Chapter One Strategic Leadership: Managing the Strategy- Making Process for Competitive Advantage

Chapter One

Strategic Leadership: Managing the

Strategy-Making

Process for Competitive Advantage

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Why do some organizations succeed while others fail?

Strategic Leadership• Task of most effectively managing a

company’s strategy-making process Strategy Formulation

• Task of determining and selecting strategies Strategy Implementation

• Task of putting strategies into action to improve a company’s efficiency and effectiveness

Competitive AdvantageResults when a company’s strategies lead to

superior performance compared to competitors

Strategy is a set of related actions that managers take to increase their company’s performance.


Superior Performance and Sustainable Competitive Advantage

Superior Performance• One company’s 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• Net profit Net income after tax

Capital invested Equity + Debt to creditors

Competitive Advantage• When a company’s profitability is greater than the average of all

other companies in the same industry & competing for the same customers

= ROIC =

Sustainable Competitive AdvantageWhen a company’s strategies enable it to maintain above average profitability for a number of years


Determinants of Shareholder Value

To increase shareholder value, managers must pursue strategies that increase the profitability

of the company and grow the profits.

Figure 1.1


A business model encompasses how the company will:

Company’s Business Model

Management’s model of how strategy will allow the company to gain competitive advantage

and achieve superior profitability

• Select its customers• Define and differentiate

its product offerings• Create value for its

customers• Acquire and keep

customers• Produce goods or

services

• Deliver those goods and services to the market

• Organize activities within the company

• Configure its resources• Achieve and sustain a

high level of profitability• Grow the business over

time


Differences in Industry and Company Performance

A Company’s 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, 1997–2003

Data Source: Value Line Investment Survey

Figure 1.2


Performance in Nonprofit Enterprises

Nonprofit entities such as government agencies, universities, and charities:• Are not in business to make a profit• Should use their resources efficiently

and effectively• Set performance goals unique to the

organization• Set strategies to achieve goals and compete

with other nonprofits for scarce resources

A successful strategy gives potential donors a compelling message as to

why they should contribute.


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 General Managers

• 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


Levels of Strategic Management

Figure 1.3


The Five Steps of the Strategy Making Process

Select the corporate vision, mission, and values and the major corporate goals and objectives.

Analyze the external competitive environment to identify opportunities and threats.

Analyze the organization’s internal environment to identify its strengths and weaknesses.

Select strategies that:• Build on the organization’s strengths and correct its weaknesses – in

order to take advantage of external opportunities and counter external threats

• Are consistent with organization’s vision, mission, and values and major goals and objectives

• Are congruent and constitute a viable business model

Implement the strat strategies.


Main Components of the Strategy- Making Process

Figure 1.4


Crafting the Organization’s Mission Statement

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


The Mission

What is it that the company does? What is the companies business?

• 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 company’s raison d’etre, its reason for existence today.

A company’s mission is best approached from a customer-oriented business definition.


The Mission Customer-Oriented Examples

The mission of Kodak is to provide “customers with the solutions they need to capture, store, process, output, and communicate images – anywhere, anytime.”

Ford Motor Company describes itself as a company that is “passionately committed to providing personal mobility for people around the world….We anticipate consumer need and deliver outstanding produces and services that improve people’s lives.”


Abell’s Framework for Defining the Business

Figure 1.5

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


The vision of Ford is “to become the world’s leading consumer company for automotive products and services.”

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.

Nokia is the world’s largest manufacturer of mobile phones and operates with a simple but powerful vision: “If it can go mobile, it will!”


Values

In high-performance organizations, values respect the interests of key stakeholders.

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 company’s mission Organizational culture

• The set of values, norms, and standards that control how employees work to achieve an organization’s 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.”

“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.


Key characteristics of well-constructed goals:1. Precise and measurable – to provide a

yardstick or standard to judge performance 2. Address crucial issues – with a limited

number of key goals that help to maintain focus3. Challenging but realistic – to provide

employees with incentive for improving4. Specify a time period – to motivate and

inject a sense of urgency into goal attainment

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.

Focus on long-run performance and competitiveness.


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• Government

Purpose is to identify the strategic opportunities and threats in the organization’s operating environment

that will affect how it pursues its mission.

• Legal• International

• Technological

External Analysis


Internal analysis includes an assessment of: Quantity and quality of a

company’s resources and capabilities

Ways 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.

Internal Analysis

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

• Efficiency• Quality

• Innovations• Responsiveness to customers


SWOT analyses help to identify strategies that align a company’s resources and capabilities to its environment – in order to create and sustain a competitive advantage.

Functional strategies should be consistent with and support the company’s 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

Selecting Strategies: SWOT Analysis and Business Model

When taken together, the various strategies pursued by a company must lead to a

viable business model.


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 – strategic planning is ongoing• 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


Planned, Deliberate, Emergent and Realized Strategies

Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science

Quarterly, Vol. 30. No. 2, June 1985.

Figure 1.6


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

company’s needs and capabilities Realized Strategies

• The product of whatever intended strategies are actually put into action and of any emergent strategies that evolve


Strategic Planning in Practice

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

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

Recent studies suggest that formal planning does have 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 errors• Prior hypothesis bias • Escalating commitment• Reasoning by analogy• Representativeness• Illusion of control

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


Processes for Improving Decision Making

Reveals problems withdefinitions, assumptions, & recommended courses of action

To bring out all the reasons that might make the proposal unacceptable

Figure 1.7


Strategic Leadership

Vision, eloquence, and consistency Commitment Being well informed Willingness to delegate and empower The astute use of power Emotional intelligence

• Self-awareness• Self-regulation• Motivation• Empathy• Social skills

Good leaders of the strategy-making process have a number of key attributes:

Documents

Chapter One Strategic Leadership: Managing the Strategy- Making Process for Competitive Advantage