CHAPTER 1 STRATEGIC LEADERSHIP MANAGING THE STRATEGYMAKING PROCESS

CHAPTER 1 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY-MAKING PROCESS FOR COMPETITIVE ADVANTAGE © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES § Explain what is meant by competitive advantage. § Discuss the strategic role of managers at different levels within the organization. § Identify the primary steps in a strategic planning process. § Discuss the common pitfalls of planning and how those pitfalls can be avoided. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

LEARNING OBJECTIVES § Outline the cognitive biases that might lead to poor strategic decisions, and explain how these biases can be overcome. § Discuss the role strategy leaders play in the strategy-making process. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

STRATEGY § Set of related actions that managers take to increase their company’s performance. § Strategic leadership - Creating competitive advantage through effective management of the strategy-making process. § Strategy formulation - Selecting strategies based on analysis of an organization’s external and internal environment. § Strategy implementation - Putting strategies into action. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

SUPERIOR PERFORMANCE § Risk capital - Equity capital for which there is no guarantee that stockholders will: § recoup their investment. § earn a decent return. § Shareholder value - The returns that shareholders earn from purchasing shares in a company. § Sources § Capital appreciation in the value of a company’s shares § Dividend payments © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6

SUPERIOR PERFORMANCE § Profitability - The return a company makes on the capital invested in the enterprise. § Return on invested capital (ROIC) - Net profit over the capital invested in a firm. § Result of how efficiently the capital is used to satisfy customer needs. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7

SUPERIOR PERFORMANCE § Profit growth - The increase in net profit over time, achieved by: § § selling products in rapidly growing markets. gaining market share from rivals. selling more to existing customers. expanding overseas or diversifying into new businesses. § To boost profitability and profit growth, managers must: § use strategies to give their company a competitive advantage over rivals. § deliver high profitability and sustainable profit growth. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

COMPETITIVE ADVANTAGE § Occurs when a company’s profitability is greater than the average profitability of firms in its industry. § Sustained competitive advantage – A company’s strategies that enable it to maintain aboveaverage profitability for a number of years. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9

BUSINESS MODEL § Conception of how strategies should work together as a whole to enable the company to achieve competitive advantage. § Deals with how a company: § § § selects, acquires, and keeps its customers. defines and differentiates its product offerings. creates value for its customers. produces goods or services and delivers to the market. lowers costs and organizes its resources and activities. achieves and sustains high profitability and growth. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

STRATEGIC MANAGEMENT General managers • Bear responsibility for a company’s overall performance or for one of its major self-contained subunits or divisions. Functional managers • Responsible for supervising a particular function, task, activity, or operation. Multidivisional company • Competes in several different businesses and has a separate self-contained division to manage each. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13

CORPORATE-LEVEL MANAGERS § Oversee the development of strategies for the entire organization. § Provide a link between people concerned with the firm’s strategic development and the shareholders. § Ensure that business strategies pursued by the company are consistent with maximizing profitability and profit growth. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

BUSINESS-LEVEL MANAGERS § Heads of business units § Business unit is a self-contained division that provides a product or service for a particular market. § Translate statements of intents into concrete strategies for individual businesses. § Are concerned with strategies specific to a particular business. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

FUNCTIONAL- LEVEL MANAGERS § Responsible for specific business functions. § Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers. § Provide information that helps formulate realistic and attainable strategies. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16

STEPS IN A FORMAL STRATEGIC PLANNING PROCESS § Select the corporate mission and goals. § Analyze the organization’s external competitive environment and internal operating environment. § Select strategies that: § build on the organization’s strengths and correct it’s weaknesses. § are consistent with the organization’s mission and goals. § are congruent and constitute a viable business model. § Implement the strategies © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

COMPONENTS OF A MISSION STATEMENT Mission • Purpose of the company, or a statement of what the company strives to do. Vision • Articulation of a company’s desired achievements or future state. Values • Statement of how employees should conduct themselves and their business to help achieve the company mission. Establishing major goals • Goal - Precise and measurable desired future state that a company attempts to realize. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20

EXTERNAL AND INTERNAL ANALYSIS § External analysis identifies strategic opportunities and threats that will affect how an organization pursues its mission. § Involves examination of the: § industry environment in which the company operates. § country or national environment. § macroenvironment. § Internal analysis focuses on reviewing the resources, capabilities, and competencies of a company. § Goals identify the company’s strengths and weaknesses. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21

SWOT ANALYSIS § Comparison of strengths, weaknesses, opportunities, and threats. § Purpose - Identify the strategies to: § exploit external opportunities. § build on and protect company strengths. § eradicate weaknesses and counter threats. § Goals - Affirm a company-specific business model. § To align, fit, or match a company’s resources and capabilities to the demands of its environment. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

SWOT STRATEGIES § Functional-level strategies - Directed at improving the effectiveness of operations within a company. § Business-level strategies - Encompass the business’s overall competitive theme. § How it positions itself in the marketplace to gain a competitive advantage. § Different position strategies that can be used in different industry settings. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

SWOT STRATEGIES § Global strategies - address how to expand operations outside the home country. § Since competitive advantage is determined at a global level. § Corporate-level strategies determine: § the businesses a company should be in to maximize profitability and profit growth. § how to gain a competitive edge. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

STRATEGY IMPLEMENTATION AND FEEDBACK LOOP § Strategy implementation § Taking action at the functional, business, and corporate levels to execute a strategic plan. § Designing the best organization structure, culture, and control systems to put a chosen strategy into action. § Feedback loop - Provides information to the corporate level on the: § strategic goals that are being achieved. § degree of competitive advantage being created and sustained. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

CRITICISMS OF FORMAL PLANNING MODELS § Unforeseen circumstances can adversely affect strategic plans. § Excessive importance is attached to the role of top management. § While ignoring lower-level managers. § Many successful strategies are a result of serendipity rather than strategic planning. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28

SCENARIO PLANNING § Formulating plans that are based on “what-if” scenarios about the future. § Encourages managers to: § think outside the box and be more flexible. § anticipate probable scenarios. § Ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

COGNITIVE BIASES AND STRATEGIC DECISION MAKING Cognitive biases • Systematic errors in human decision making. • Arise from the way people process information. Prior hypothesis bias • Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong. Escalating commitment • Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing. Reasoning analogy • Use of simple analogies to make sense out of a complex problem. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30

COGNITIVE BIASES AND STRATEGIC DECISION MAKING Representativeness • Tendency to generalize from a small sample or a single vivid anecdote. • Violates the statistical law of large numbers. Illusion of control • Tendency to overestimates one’s ability to control events. • General or top managers are more prone to this. Availability error • Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31

TECHNIQUES FOR IMPROVING DECISION MAKING Devil’s advocacy • A member of a decision-making team identifies all the considerations that might make a proposal unacceptable. • Possible perils of recommended courses of action are brought into light. Dialectic inquiry • Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action. • Promotes strategic thinking. Outside view • Identification of past successful or failed strategic initiatives to determine if they will work for the current project. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32

CHARACTERISTICS OF GOOD STRATEGIC LEADERS § § § § Vision, eloquence, and consistency Articulation of a business model Commitment Being well informed Willingness to delegate and empower Astute use of power Emotional intelligence § Self-awareness, self-regulation, and motivation § Empathy and social skills © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33