Module 2 - The Three Strategy-Making Tasks

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 Company’s 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 firm’s 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

• Strategic leadership starts with

– Concept of what a firm should and should notdo

– Vision of where a firm needs to be headed

Characteristic of a Strategic Vision and Mission

Example of a Strategic Vision

Delta Airlines

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


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.


Delta Airlines

AIRLINE, because we intend to stay in the business we know best – air transportation and related services. We won’t 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.


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 result-oriented workplace that recognized and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return.

Defining a Company’s 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 Company’s Business

• Looking outward at customer needs makes the business definition

– Customer-driven

– Market-driven

• Looking inward at technologies and functions indicates scope of firm’s 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.

McDonald’s

– 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 don’t 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.


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.


• 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

– Department’s contribution to firm’s mission

– Department’s 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 firm’s 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 management’s view of firm’s 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!

• 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 firm’s mission into concrete performance outcomes!

Second Direction-Setting Task:Establishing Objectives

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 firm’s financial performance

– Acceptable financial performance is critical to firm’s survival

• Strategic Objectives

– Relate to firm’s 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?

Short-Run Objectives

• Focus on short-term performance

Long-Run Objectives

• Focus on long-term performance

Required for Every Key Result Area

Strategic Management Principle

Every company needs both strategic and financial objectives!

Example: Corporate Objectives

McDonald’s

• 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 company’s 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 long-term gains for near-term financial gains risks

– Diluting its competitiveness

– Losing momentum in its markets

– Impairing its ability to stave off rival’s challenges


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


• Strategic objectives indicate firm’s strategic intent to stake out a particular position

• Time horizon of strategic intent is long-term

• A firm’s strategic intent

– Serves as rallying cry for employees to do their very best

– Signals deep-seated commitment to winning


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 today’s decisions on future performance


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-lineobjectives

3. Then, establish functional area and department objectives

4. Individual objectives come last


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 measurableterms

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 decision-making for aimless actions over what to accomplish

2. To provide benchmarks for judging just how good firm’s actual strategic performance turns out to be


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.


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.


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 world’s best in chemical and electronic imaging.


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.

• A firm’s strategy consists of combined actions management has taken and intends to take in

– Achieving strategic and financial objectives

– Pursuing organization’s mission

Third Direction-Setting Task:Crafting a Strategy

Characteristics of Strategy-Making

• Action-oriented, concerning

– What to do

– When to do it

– Who should be involved


• 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


• Never-ending, resulting in firm’s actual strategy being a blend of its

– Intended or Planned strategy

– As-Needed Reactions to new developments and unforeseen conditions

A Diversified Company

Operating

Strategies

Functional

Strategies

Business

Strategies

Corporate

Strategy

Two-Way Influence

Two-Way Influence

Two-Way Influence

Plant Managers, Lower-Level Supervisors

Heads of Major Functional Areas

Business-Level General Managers

Corporate-Level Managers

A Single Company

Operating

Strategies

Functional

Strategies

Business

Strategies

Two-Way Influence

Two-Way Influence

Plant Managers, Lower-Level Supervisors

Heads of Major Functional Areas

Senior Managers

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


– Formulated by functional-area managers within each business unit


– Formulated by plant managers, geographic unit managers, and lower-level managers

Identifying the Corporate Strategy of a Diversified Company

Corporate

Strategy

Kind of Diversification

Responses to

Changing Conditions

Moves to Build

Competitive Advantage

Via Diversification

Moves to Strengthen

Positions and Profits in

Existing Businesses

Moves to Add New

Businesses and Build

New Positions

Moves to Divest

Weak Units

Approach to

Capital Allocation

How Much

Diversification

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

Manufacturing

Strategy

Corporate

Strategy

Responses to Changing Conditions

Approach to Vertical

Integration

Moves to Secure

Competitive Advantage

Moves to Strengthen

Competitive Positions

and Improve

Performance

Finance

Strategy

Marketing

Strategy

Basic Competitive

Approach

Human Resources

StrategyR&D

Strategy

What Is Business Strategy

• Game plan for one line of business

• Central thrust is how to build and strengthen firm’s long-term competitive position

• Task separating powerful from weakbusiness 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 firm’s competitive position and internal situation


• 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


• 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

Corporate Level

Strategy

Corporate Level

Objectives

Overall Scope and

Strategic Mission

Two-Way Influence

Business Level

Mission

Business Level

Objectives

Business Level

Strategies

Two-Way Influence Two-Way Influence

Two-Way Influence

Functional Area

Mission

Functional Area

Objectives

Functional Area

Strategies

Two-Way Influence Two-Way Influence

Operating

Mission

Field Unit

Objectives

Operating

Strategies

Two-Way Influence Two-Way Influence Two-Way Influence

Level 1Corporate-Level Managers

Level 2Business-Level General Managers

Level 3Heads of Major Functional Areas

Level 4Plant Managers, Lower-Level Supervisors

Uniting Strategy-Making Effort

• A firm’s 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 fittogether like pieces of a puzzle

• Consistency among business, functional, and operating strategies comes from strategy-makers’ allegiance to business objectives


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

Conclusion

about how

internal /

external

factors

matter

Identification

and

evaluation of

alternatives

Crafting

Strategy for

Overall

SituationCompany’s Strategic Situation

Industry

Attractiveness

Key

Executives’

Influences

External Factors

Internal Factors

Societal,

Political,

Regulatory

Factors

Opportunity

and Threat

Shared

Values and

Cultures

Internal

Strength

and

Weakness

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


A company’s 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


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

Company Strengths and Weaknesses

• A firm’s strategy must be well-matched to its

– Internal strengths and weaknesses

– Competitive capabilities

• Does firm have core competencies?

• Core competencies are critical to strategy-making because of

– Capabilities provided in capitalizing on a particular opportunity

– Competitive edge yielded in marketplace

– Potential for being a cornerstone of strategy


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

• HP’s basic values – “the HP ways”

– Sharing firm’s 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 firm’s situation?

• Competitive Advantage Test

– Does strategy lead to sustainable competitive advantage?

• Performance Test

– Does strategy boost firm performance?


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

Approaches to Performing Strategy-Making 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

Module 2 - The Three Strategy-Making Tasks

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