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Chapter One

StrategicLeadership:

Managing theStrategy-Making

Process forCompetitiveAdvantage



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Chapter Outline:

Strategic Leadership, CompetitiveAdvantage, Superior Performance

Strategic Managers

Strategy-Making Process Strategy as an Emergent Process

Strategic Planning in Practice

Strategic Decision Making Strategic Leadership




Why do some organizations succeedwhile others fail?

Strategic Leadership

• Task of most effectively managing acompany’s strategy-making process

Strategy Formulation• Task of determining and selecting strategies

Strategy Implementation

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

Competitive Advantage results when acompany’s strategies lead to superior performance compared to competitors

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




Superior Performance andSustainable 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 samecustomers

=ROIC =

Sustained Competitive AdvantageWhen a company’s strategies enable it to maintainabove average profitability for a number of years




Determinants ofShareholder Value

To increase shareholder value, managers mustpursue strategies that increase the profitability

of the company and grow the profits.

Figure 1.2




A business model encompasses how the company will:

Company’s Business Model

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

and achieve superior profitability

• Select its customers

• Define and differentiate itsproduct offerings

• Create value for its

customers• Acquire and keepcustomers

• Produce goods or services

• Lower costs

• Deliver those goods andservices to the market

• Organize activities withinthe company

• Configure its resources• Achieve and sustain a high

level of profitability

• Grow the business overtime


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Differences in Industryand Company Performance

A Company’s Profitability andProfit Growth are determined bytwo main factors:

The overall performanceof its industry relativeto other industries

Its relative success in itsindustry as compared to thecompetitors



Return on Invested Capitalin Selected Industries, 2002 –2006

Data Source: Value Line Investment Survey

Figure 1.3



Performance in Nonprofit Enterprises

Nonprofit entities such as governmentagencies, universities, and charities:• Are not in business to make a profit

• BUT…still need to use their resources

efficiently and effectively• Must meet goals

• Set strategies to achieve goals and competewith other nonprofits for scarce resources

A successful strategy gives potentialdonors 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 Business-Level Managers

• Responsible for overall company, business unit,or divisional performance

Functional-Managers• Responsible for supervising a particular task oroperation (e.g. marketing, operations, accounting,human resources)



Levels of Strategic Management

Figure 1.4



The Five Steps of theStrategy Making Process

Select the corporate mission and the majorcorporate goals .

Analyze the external competitive environment toidentify opportunities and threats.

Analyze the organization’s internal environmentto 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 mission and major goals• Are congruent and constitute a viable business model

Implement the strategies.



Crafting the Organization’s MissionStatement

Provides a framework or context withinwhich 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 iscommitted to Major Goals –

The measurable desired future state that anorganization 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 company’sreason for existence today.

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



Abell’s Frameworkfor Defining the Business

Figure 1.6

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’sleading consumer company for automotiveproducts 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 butpowerful vision: “If it can go mobile, it will!”



Values

In high-performance organizations, valuesrespect 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 buildto 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 andgoals

• Often seen as an important source of competitive advantage



Values at Nucor

“Management is obligated to manage Nucor in such away that employees will have the opportunity to earnaccording to their productivity.”

“Employees should be able to feel confident that if they do their jobs properly, they will have a jobtomorrow.”

“Employees have the right to be treated fairly andmust believe that they will be.”

“Employees must have an avenue of appeal whenthey believe they are being treated unfairly.”

At Nucor, values emphasizing pay for performance, jobsecurity, and fair treatment for employees help to createan 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 limitednumber of key goals that help to maintain focus

3. 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 desiredfuture state that a company must realizeif it is to attain its vision or mission.

Focus on long-run performance andcompetitiveness.




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• Governmental

Purpose is to identify the strategic opportunities and threats in the organization’s operating environmentthat will affect how it pursues its mission.

• Legal• International

• Technological• Macroeconomic

External Analysis




Internal analysis includes an assessment of:

Quantity and quality of acompany’s resources andcapabilities

Ways of building uniqueskills and company-specificor distinctive competencies

Purpose is to pinpoint the strengths and weaknesses of the organization. Strengths lead to superiorperformance and weaknesses to inferior performance.

Internal Analysis

Building & sustaining a competitive advantagerequires a company to achieve superior:

• Efficiency• Quality

• Innovations• Responsiveness to customers




SWOT analyses help to identify strategies that aligna company’s resources and capabilities to itsenvironment – in order to create and sustain acompetitive advantage.

Functional strategies should be consistent with and

support the company’s business level and globalstrategies.• 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: SWOTAnalysis and Business Model

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

viable business model.




Strategy Implementation

After choosing a set of congruent strategies toachieve competitive advantage, managersmust 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 ethicalcompliance

• Consistency with maximizing profit and profitgrowth




⑥The 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 andimplementation

Strategic planning is ongoing.




Emergent and Deliberate Strategies

Source: Adapted from H. Mintzberg andA. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.

Figure 1.7




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 unprecedentedchanges and unplanned events after the formal planning is

completed Emergent Strategies

• Unplanned responses to unforeseen circumstances

• Serendipitous discoveries and events may emerge that canopen up new unplanned opportunities

• Must assess whether the emergent strategy fits thecompany’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 thecurrent state

• Sets ambitious vision and goals that stretch a company and

then finds ways to build to attain those goals

Studies suggest that formal planning has a positiveimpact on company performance – and should includethe 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

• Availability error

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



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 skills

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