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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
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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.
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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
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Determinants ofShareholder Value
To increase shareholder value, managers mustpursue strategies that increase the profitability
of the company and grow the profits.
Figure 1.2
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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
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Return on Invested Capitalin Selected Industries, 2002 –2006
Data Source: Value Line Investment Survey
Figure 1.3
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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.
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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)
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Levels of Strategic Management
Figure 1.4
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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.
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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
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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.
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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.
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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!”
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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Emergent and Deliberate Strategies
Source: Adapted from H. Mintzberg andA. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.
Figure 1.7
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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
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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.
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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
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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: