Module 2

Strategy Formulation

Contents

The Strategy-Making, Strategy-Executing Process

Phase 1 of the Strategy-Making, Strategy-Executing Process: Developing a Strategic Vision

Phase 2 of the Strategy-Making, Strategy-Executing Process: Setting Objectives

Phase 3 of the Strategy-Making, Strategy-Executing Process: Crafting a Strategy to Achieve the Vision and Objectives

Case Discussion: Air Asia – What should be their Entry Strategy

for India?

The Strategy-Making, Strategy-Executing Process

Developing a Strategic Vision

Involves thinking strategically about:

Overall future direction of company

Specific changes in company’s product/market/customer technology to improve:

Current market position

Future prospects

Phase 1 of the Strategy-Making Process

A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic

course in preparing for the future.

Key Elements of a Strategic Vision Describes management’s aspirations for the business Provides a panoramic view of “where we are going” Is distinctive and specific to a particular organization Captures the emotions of employees and steers them in a

common direction

Is challenging and a bit beyond a company’s immediate reach Amazon.com

Our vision is to be the world's most customer centric company ; to build a place where people

can come to find and discover anything they might want to buy online.

McDonald’sTo be the world's best quick service restaurant experience.

Being the best means providing outstanding quality, service, cleanliness and value, so that we make every

customer in every restaurant smile.

Mission Statement

Identifies the boundaries of the current business and highlights:

Present products and services Types of customers served Geographic coverage

Conveys: Who we are, What we do, and Why we are here

A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?” Making a profit is an objective or intended

outcome!

Example of Mission Statement

FedEx Corporation

FedEx will produce superior financial returns for shareowners by providing high value-added supply chain, transportation, business and related information services through focused operating companies. Customer requirements will be met in the highest quality manner appropriate to each market segment served. FedEx will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consideration in all operations. Corporate activities will be conducted to the highest ethical and professional standards.

Mission Statement v/s Strategic Vision

A strategic vision concerns a firm’s future business path - “wherewe are going” Markets to be pursued Future product/market/

customer/technology focus Type of company management is

trying to create

The mission statement of a firm focuses on its present business purpose - “who we are and what we do” Current product and service

offerings Customer needs being served Technological and business

capabilities

VISION

* Future-oriented

* Inspirational

MISSION

* Present-focused

* Informational

Test Your Knowledge

The difference between a company's mission statement and the concept of a strategic vision is that:

A.the mission statement lays out the desire to make a profit, whereas the strategic vision addresses what strategy the company will employ in trying to make a profit.

B.a mission statement deals with “where we are headed ” whereas a strategic vision provides the critical answer to “how will we get there?”

C.a mission deals with what a company is trying to do and a vision concerns what a company ought to do.

D. a mission statement typically concerns an enterprise’s present business scope and purpose—“who we are, what we do, and why we are here”—whereas the focus of a strategic vision is on the direction the company is headed and what its future product-customer-market-technology focus will be.

E.a mission is about what to accomplish for shareholders whereas a strategic vision concerns what to accomplish for customers.

Strategic Inflection Point

Strategic Inflection Point is an order-of-magnitude change in a company’s environment that:

Dramatically alters its future prospects Mandates radical revision of its strategic course

Critical decisions have to be made about ‘where to go from here’:

A major new directional path may have to be taken A major new strategy may be needed

Not responding quickly to unfolding changes in the marketplace results in:

Becoming trapped in a stagnant business or Letting attractive new growth opportunities slip away

e.g. Kingfisher Airlines’s difficult situation due to external

market conditions and internal mis-management

Intel’s ‘Strategic Inflection Points’

Prior to mid-1980s Focus on memory chips

Starting in mid-1980s Abandon memory chip business (due to lower-cost

Japanese companies taking over the market) and Become preeminent supplier of microprocessors

to PC industry Make PC central appliance in workplace and home Be undisputed leader in driving PC technology

forward 1998 onwards

Shift focus from PC technology to becoming the premium supplier to Internet economy

Setting Objectives

Purpose of setting objectives Converts vision into specific performance targets

Creates measures to track performance

Well-stated objectives are Quantifiable

Measurable

Contain a deadline for achievement

Clarify how much of, what kind of performance and by when e.g. Hero Motors aims to capture 50% market share in 2-

wheelers by 2015

Phase 2 of the Strategy-Making Process

Types of Objectives

Outcomes focused

on improving

financial

performance

Outcomes focused on improving competitive

vitality and future business position

Financial Objectives Strategic Objectives

Strategic Objectives: Place more emphasis on delivering an exceptional

customer experience Add 350 new restaurants by FY end Reduce general and administrative spending as a

percent of total revenues Financial Objectives:

System wide sales and revenue growth of 8-9% Annual operating income growth of 6-7% Annual returns on incremental invested capital of 17-

18%

McDonald’s Strategic and FinancialObjectives

Test Your Knowledge

Which of the following represents the best example of a well-stated strategic objective (as opposed to a well-stated financial objective)?

A. Achieve revenue growth of 150% annually

B. Achieve a AA bond rating within 3 years and an annual cash flow of $750 million

C. Invest more money in R&D to enable the company to offer customers the widest selection of products in the industry

D. Increase market share from 15% to 20% and achieve the lowest overall costs of any producer in the industry, both within three years

E. Pay more attention to reducing costs over the next two years

The Balanced Scorecard –Setting Strategic and Financial Objectives Developed by Robert Kaplan (Harvard) and David

Norton in the early 1990’s A Balanced Scorecard is a strategic management

system used for measuring company performance and involves:

Setting financial and strategic objectives Placing balanced emphasis on achieving both

these objectives The Balanced Scorecard suggests viewing the

company from four perspectives: Customer perspective Financial perspective Internal Business Processes perspective Learning and Growth perspective

Develop metrics, collect data and analyze each of these perspectives

The Balanced Scorecard

Why Implement a Balanced Scorecard?

Increased focus on strategic implementation and results

Improved organizational performance by measuring what really matters

Align organization strategy with the work people do on a day-to-day basis

Focus on the drivers of future performance Improved communication of the organization’s Vision

and Strategy Prioritize Projects / Initiatives

Philips, Tata Motors etc. have implemented Balanced Scorecard and reaped huge benefits

Short-Term v/s Long-Term Objectives

Short-term objectives: Targets to be achieved within 1 year

e.g. Airtel - reach ARPU of Rs. 250 by December 2013

Milestones or steps for reaching long-range performance

Medium to Long-term objectives: Targets to be achieved within 3 to 5 years

e.g. Nike - achieve $35 billion revenues by 2016 Initiate actions now that will permit reaching

targetedlong-range performance later

Objectives are needed at all levels

A top-down approach for setting objectives isgenerally followed: First, establish group objectives and performance

targets

Next, set business objectives

Then, establish functional and departmental objectives

Individual objectives are established last

e.g. Objectives setting at Reliance Industries: Group

Business (Refinery, Petrochemicals, Textiles, Retail)

Functional (Marketing, Finance, HR, Operations)

Individual employees

Concept of Strategic Intent

Created by Gary Hamel (London Business School) and CK Prahalad (University of Michigan)

A company exhibits Strategic Intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective!

e.g. Canon’s intention to overpower Xerox ; Toyota’s ambition to surpass General Motors’s sales

Characteristics of Strategic Intent Indicates firm’s intent to making significant gains

in competing against key rivals and to establishing itself as a winner in the marketplace, often against severe odds

Involves establishing a extravagant performance target beyond immediate capabilities and market position but then devoting a firm’s full resources and energies to achieving the target over time

Signals relentless commitment toachieving and maintaining a particular market position and competitive standing

Test Your Knowledge

A company pursues strategic intent when:

A. it pursues its strategic vision.

B. it crafts a strategy and proceeds to implement it.

C. it adopts a strategic plan and tries to execute it.

D. it sets objectives and pursues their achievement.

E. it relentlessly pursues an ambitious strategic objective and concentrates its full resources and competitive actions on achieving that objective.

Crafting a Strategy

Strategy-making involves entrepreneurship: Actively searching for opportunities to do new things

or Actively searching for opportunities to do

existing things in new or better ways Strategizing also involves:

Developing timely responses to happenings in the external environment and

Steering company activities in new directions dictated by shifting market conditions

e.g. Yahoo’s acquisitions of Rockmelt (news aggregator), Tumblr (blogging), Lexity (e-commerce analytics) etc.

Phase 3 of the Strategy-Making Process

Who participates in Crafting Corporate Strategy?

CEO (Chief Executive Officer): Has ultimate responsibility for leading the

strategy-making, strategy-executing process Functions as strategic visionary and

Chief Architect of strategy COO(Chief Operating Officer), Vice-Presidents:

Lead efforts to create chief strategy components in their own areas of responsibility

General Managers of subsidiaries, divisions and other important operating units: On-the-scene people with detailed knowledge of local

competitive conditions and customer requirements/expectations

Why are Collaborative Effortsused in the Strategy-Making Process?

Many strategic issues are complex or cut across multiple areas of expertise

Ideas of people with different expertise and perspectives strengthen the strategizing effort

A team effort in crafting the strategy enhances motivation, commitment and accountability in executing the strategy and making it work

Strategy-Making role of Corporate Intrapreneurs Intrapreneurship is the act of working like an Entrepreneur while

functioning within a large organization Companies such as Accenture, Coca-Cola, Hilton actively encourage

Intrapreneurs

Involves encouraging lower-level managers/employees to lead significant initiatives and join in on the strategy-making effort

Unleashes talents and energies of employees to brainstorm and champion suggestions for:

New technologies or technological applications New products or services New business ventures

Requires that Senior Executives: Provide organizational and budgetary support for worthwhile proposals Create an organizational climate where free-thinking and new ideas are

welcome

Levels of Strategy-Making in a Diversified Company (e.g. Reliance Industries)

Corporate Strategy

Business Strategies

Functional Strategies

Operating Strategies

Two-Way Influence

Two-Way Influence

Two-Way Influence

Corporate Level Managers

Business Level Managers

Functional Managers

OperatingManagers

Levels of Strategy-Making in aSingle-Business Company (e.g. Maruti-Suzuki)

Business Strategy

Two-Way Influence

Functional Strategies

Operating Strategies

Business Level Managers

OperatingManagers

Functional Managers

Two-Way Influence

Tasks of Corporate Strategy (Group Level)

Actions to improve performance of all the group businesses

Establishing investment priorities:

By steering corporate resources into the most attractive businesses

and

Taking appropriate decisions on loss-making businesses

Making suitable moves to achieve diversification into other businesses

Initiating approaches to produce successful performance in a specific business

e.g. Refinery, Petrochemicals, Textiles, Retail in Reliance

Industries

Crafting competitive moves to build sustainable competitive advantage

Uniting strategic activities of functional areas

Align suitable resources for functional and operational activities

Tasks of Business Strategy

Game plan for a particular function or business process

e.g. Marketing, Finance, HR

Provide support for business strategy

Specify how functional objectivesare to be achieved

Detail how key operational activities will be managed

Tasks of Functional Strategies

Tasks of Operating Strategies Relates to focused approaches for managing

key operating units and strategically-relevant operating activities

e.g. Advertising in Marketing ; Taxation in Finance ;

Talent Planning in HR

Adds minute details to business and functional strategies

Delegation of responsibility to frontline managers and their teams

Test Your Knowledge

The strategy-making hierarchy in a single business company consists of

A. it pursues business strategy, divisional strategies, and departmental strategies.

B. business strategy, functional strategies, and operating strategies, whereas in a diversified company it consists of corporate strategy, business strategies (one for each business the diversified company is in), functional strategies, and operating strategies.

C. business strategy and operating strategy.

D. company strategy, divisional strategies, and functional strategies.

E. corporate strategy, divisional strategies, and departmental strategies.

Activity Design a Balanced Scorecard for IBM, Vodafone,

HBO, Hyundai, Puma and Citibank with regard to the four perspectives:

Customer perspective Financial perspective Internal Business Processes perspective Learning and Growth perspective