Managements job is not to see the company

“Management’s job is not to see the company as it is…. but as it can become. ” John W. Teets “A strategy is a commitment to undertake one set of actions “Quote” rather than another. ” Sharon M. Oster Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Chapter Outline u Developing a Strategic Vision / Mission u Establishing Financial and Strategic Objectives u Crafting a Strategy u Factors Shaping a Company's Strategy u Linking Strategy With Ethics u Approaches to Performing the -Making Task Strategy 2 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Developing a Vision or Mission First Direction-Setting Task u Indicates the long-term course management has charted for the organization -Our future direction will be. . . l Business activities to be pursued l Future market position l Future customer focus l Kind of company to become 3 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Why Have a Mission or Strategic Vision? u Power of a well-conceived strategic vision l Guides managerial decision-making l Arouses employee buy -in and commitment l Prepares a company for the future 4 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Characteristics of a Strategic Vision Charts a company’s future strategic course l Defines the business makeup in 5 to 10 years u Company specific, not generic l Provides a company with its own special identity and path to follow u The vision is not to make a profit l The real mission/vision is “what will we do to make a profit? ” u Requires the exercise of management foresight u x 5 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Elements of a Strategic Vision Defines present and future business make-up of company Charts a long-term path to follow Communicated in an inspiring and exciting manner 6 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Defining a Company’s Business u A good business definition incorporates three factors l Customer needs -- WHAT is being satisfied l Customer groups -- WHO is being satisfied l Technologies used and functions performed -- HOW customer needs are satisfied 7 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Business Mission: Mc. Donald’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. Mc. Donald’s serves approximately 30 million customers daily at 20, 000 -plus restaurants in over 90 countries. 8 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Broad - Narrow Mission Statements? u Narrow enough to specify real arena of interest u Serve as u l Boundary for what to do and not do l Beacon of where top management intends to take firm Diversified companies employ broader business definitions 9 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Definitions: Broad - Narrow Scope u Broad l Definition Beverages l Children’s products l Furniture l Global mail delivery l Travel & tourism u Narrow Definition l Soft drinks l Toys l Wrought iron lawn furniture l Overnight package delivery l Ship cruises in the Caribbean 10 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Mission Statements for Functional Departments u Spotlights department’s l Contribution to firm’s mission/vision/objectives l Role and scope of activities l Direction which department needs to pursue 11 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Decision Time: What Will the Vision Be? u Entrepreneurial challenge -l Creatively preparing a company for the future u Astute strategists focus on Shifting customer needs l New technologies l Attractive foreign markets l Growing or shrinking opportunities l 12 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Intel’s “Strategic Inflection Points” Pre - mid 1980 s l Business focus was memory chips u Post - mid 1980 s l Abandon memory chip business l Adopt new strategic vision Ø Become preeminent supplier of microprocessors to PC industry Ø Make PC central appliance in workplace and home Ø Be undisputed leader in driving technology forward u PC 13 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Communicating the Vision u An exciting, inspirational vision l Inspires, challenges, and motivates workforce l Arouses strong sense of organizational purpose and induces employee buy-in l Brings workforce together and galvanizes people to live the business 14 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Managerial Value: Strategic Vision and Mission u Crystallizes u Reduces long-term direction risk of rudderless decision- making u Conveys organizational purpose and identity u Keeps direction-related actions of lower -level managers on common path u Helps organization prepare for the future 15 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Establishing Objectives Second Direction-Setting Task u Represent commitment to achieve specific performance targets by a certain time u Must be stated in quantifiable terms and contain a deadline for achievement u Spell-out how much of what kind of performance by when 16 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Purpose of Objectives u Substitutes results-oriented decision-making for aimlessness over what to accomplish u Provides benchmarks for judging organizational performance 17 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle Companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies whose managers exhibit good intentions, try hard, and hope for the best! 18 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Types of Objectives Required Financial Objectives Strategic Objectives Outcomes that improve a firm’s financial performance Outcomes that strengthen a firm’s competitiveness and long-term market position $ 19 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle Every company needs both strategic and financial objectives! 20 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Examples: Financial Objectives Achieve revenue growth of 10% per year u Increase earnings by 15% annually u Increase dividends per share by 5% per year u Increase net profit margins from 2% to 4% u Attractive EVA performance u Stronger bond and credit ratings u A rising stock price (outperform the S&P 500) u Attractive increases in MVA u Recognition as a “blue chip” company u A more diversified revenue base u 21 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Examples: Strategic Objectives A bigger market share u Quicker design-to-market times than rivals u Higher product quality than rivals u Lower costs relative to key competitors u Broader product line than rivals u A stronger reputation with customers than rivals u Better customer service than rivals u Recognition as a leader in technology u Wider geographic coverage than rivals u More innovative products than rivals u Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998 22

Corporate Objectives: Mc. Donald’s To achieve 100 percent total customer satisfaction. . . everyday. . . in every restaurant. . . for every customer. 23 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Corporate Objectives: 3 M Corporation 30 percent of the company’s annual sales must come from products fewer than four years old. 24 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Corporate Objectives: Anheuser-Busch u u u To make all our companies leaders in their industries in quality while exceeding customer expectations. To achieve a 50% share of the U. S. beer market. To establish and maintain a dominant leadership position in the international beer market. To provide all our employees with challenging and rewarding work, . . . , and opportunities for personal development, advancement, and competitive compensation. To provide our shareholders with superior returns by achieving double-digit annual earnings per share growth, . . . 25 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic or Financial Objectives -Which Take Precedence? u Pressures for better short-term financial performance become pronounced when l Firm is struggling financially l Resource commitments for new strategic initiatives may hurt bottom-line for several years l Proposed strategic moves are risky u A firm that consistently passes up opportunities to strengthen its long-term competitive position l Risks diluting its competitiveness l Risks losing momentum in its markets l Can hurt its ability to fend off rivals’ challenges 26 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle Building a stronger long-term competitive position benefits shareholders more lastingly than improving short-term profitability! 27 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

The Concept of Strategic Intent A company exhibits STRATEGIC INTENT when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective! 28 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

The Concept of Strategic Intent u Indicates firm’s intent to stake out a particular position over the long-term u Serves as a rallying cry for employees to do their very best u Signals deep-seated commitment to winning 29 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Objectives Are Needed at All Levels Process is top-down, not bottom-up! 1. First, establish organization-wide objectives 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. individual objectives come last 30 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle Objective-setting needs to be more of a top-down than a bottom-up process in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives. 31 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Crafting a Strategy Third Direction-Setting Task u An organization’s strategy deals with l How to make management’s strategic vision a reality l The game plan for Ø Moving the company into an attractive business position Ø Building a sustainable competitive advantage 32 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategizing Is HOW To. . . u Achieve performance targets u Out-compete rivals u Achieve sustainable competitive advantage Our game plan for running the company will be. . . u Strengthen firm’s long-term competitive position u Make the strategic vision a reality 33 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Fig. 2 -1(a): Levels of Strategy-Making: A Diversified Company Corporate-Level Managers Corporate Strategy Two-Way Influence Business-Level Managers Business Strategies Two-Way Influence Functional Managers Functional Strategies Two-Way Influence Operating Managers Operating Strategies 34 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Levels of Strategy-Making: A Single-Business Company Executive-Level Managers Business Strategy Two-Way Influence Functional Managers Functional Strategies Two-Way Influence Operating Managers Operating Strategies 35 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Corporate Strategy for a Diversified Company Kind of Diversification How Much Diversification Approach to Capital Allocation Responses to Changing Conditions Corporate Strategy Moves to Divest Weak Units Moves to Add New Businesses Efforts to Build Competitive Advantage Via Diversification Moves to Strengthen Positions and Profits in Present Businesses 36 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Tasks of Corporate Strategy u Moves to achieve diversification u Actions to boost performance of individual businesses u Capturing synergy among business units 2 + 2 = 5 effects! u Establishing investment priorities and steering corporate resources into the most attractive business units 37 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategy Components of a Single-Business Company Responses to Changing Conditions Strategic Alliances and Collaborative Partnerships Manufacturing Strategy Basic Competitive Approach Business Strategy Marketing Strategy R&D Strategy Human Resources Strategy Finance Strategy Moves to Secure Competitive Advantage Geographic coverage; approach to vertical integration 38 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

What Business Strategy Involves u Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations, etc. u Crafting competitive moves leading sustainable competitive advantage u Building competitively valuable competencies and capabilities u Uniting strategic initiatives of functional areas u Addressing strategic issues facing the company to 39 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Functional Strategies u Game plan for a strategically-relevant function, activity, or business process u Details how key activities will be managed u Provide support for business strategy u Specify how functional objectives are to be achieved 40 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Operating Strategies u Concern narrower strategies for managing grassroots activities and strategically-relevant operating units u Add detail to business and functional strategies but of lesser scope 41 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Example: Operating Strategy Boosting Worker Productivity To boost productivity by 10%, managers of firm with lowprice, high-volume strategy take following actions: l Recruitment manager develops selection process designed to weed out all but best-qualified candidates l Information systems manager devises way to use technology to boost productivity of office workers l Compensation manager devises improved incentive compensation plan l Purchasing manager obtains new efficiencyincreasing tools and equipment 42 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Example: Operating Strategy Improving Delivery & 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: l Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item l Staffing strategy of maintaining workforce capability to ship any order within 24 hours 43 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Networking of Missions, Objectives, and Strategies Level 1 Corporate-Level Managers Level 2 Business-Level Managers Level 3 Functional Managers Level 4 Overall Scope and Strategic Vision Corporate Level Objectives Corporate Level Strategy Two-Way Influence Business Level Strategic Vision Business Level Objectives Business Level Strategies Two-Way Influence Functional Missions Functional Objectives Functional Strategies Two-Way Influence Operating Objectives Operating Strategies Plant Managers, Missions Lower-Level Supervisors 44 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Factors Shaping the Choice of Company Strategy Societal, Political, Regulatory Factors Competitive Conditions & Industry Attractiveness Company Opportunities & Threats Company’s Strategic Situation Resource Strengths & Weaknesses Influences of Key Executives Shared Values & Culture External Factors Determine Relevance of Internal & External Factors Identify & Evaluate Alternatives Craft the Strategy Internal Factors 45 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Social, Political, Regulatory, and Citizenship Factors u u u u u Pressures from special interest groups Glare of investigative reporting Health and nutrition concerns Concerns about alcohol and drug abuse Sexual harassment Corporate downsizing Impact of plant closings on communities Rising/falling interest rates Recessionary economic conditions Trade restrictions, tariffs, and import quotas 46 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Corporate Social Responsibility u Conduct company activities within bounds of what is considered ethical and in public interest u Respond positively to emerging societal priorities and expectations u Demonstrate willingness to take needed action ahead of regulatory confrontation u Balance stockholder interests against larger interest of society as a whole u Be a “good citizen” in community 47 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Competitive Conditions and Industry Attractiveness u. A company’s strategy has to be responsive to l Fresh moves of rival competitors l Changes in industry’s price-cost-profit economics l Shifting l New buyer needs and expectations technological developments l Pace of market growth 48 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle A company’s strategy can’t produce real market success unless it is well-matched to industry and competitive conditions! 49 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Company Opportunities and Threats u For strategy to be successful, it has to be well matched to l A company’s best opportunities l Threats to the company’s well-being 50 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Company Strengths, Competencies, and Competitive Capabilities u A company must have or be able to acquire the resources, competencies, and competitive capabilities needed to execute the chosen strategy u Resource deficiencies, gaps in skills, and weaknesses in competitive position make pursuit of certain strategies risky or altogether unwise 51 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle A company’s strategy ought to be grounded in its resource strengths and in what it is good at doing (its competencies and competitive capabilities); it is perilous to craft a strategy whose success is dependent on resources and capabilities that a company lacks! 52 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Ethical Responsibilities of Firm to Stakeholders u Owners/shareholders - Expect some form of return on their investment u Employees - Expect respect for their worth and devoting their energies to firm u Customers - Expect reliable, safe product or service u Suppliers - Expect equitable relationship with firm u Community - Expect businesses to be good citizens in their community 53 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Tests of a Winning Strategy u GOODNESS l OF FIT TEST How well is strategy matched to firm’s situation? u COMPETITIVE l ADVANTAGE TEST Does strategy lead to sustainable competitive advantage? u PERFORMANCE l TEST Does strategy boost firm performance? 54 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998

Strategic Management Principle To be a real winner, a strategy must (1) Fit the enterprise’s situation (2) Build sustainable competitive advantage (3) Improve company performance 55 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 1998