The Managerial Process of Crafting and Executing Strategy

The Managerial Process of Crafting and Executing Strategy Mc. Graw-Hill/Irwin Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

“If you don’t know where you are going, any road will take you there. ” The Koran

Fig. 2. 1: The Strategy-Making, Strategy-Executing Process

Developing a Strategic Vision Phase 1 of the Strategy-Making Process • Involves thinking strategically about – Future direction of company – Changes in company’s product/market/customer technology to improve • Current market position • Futurevision prospects A strategic describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic course in preparing for the future.

Strategic Vision vs. Mission • A strategic vision concerns a firm’s future business path - “where we are going” – Markets to be pursued – Future product/market/ customer/technology focus – Kind of company management is trying to create • The mission statement of a firm focuses on its present business purpose - “who we are and what we do” – Current product and service offerings – Customer needs being served – Technological and business capabilities

Characteristics of a Mission Statement • Identifies the boundaries of the current business and highlights • Conveys – Who we are, – What we do, and – Why we are here A well-conceived mission statement distinguishes a company’s business makeup from that of other profit-seeking enterprises in language specific enough to give the company its own identify!

Examples: Vision Slogans Levi Strauss & Company “We will clothe world by marketing the most appealing and widely worn casual clothing in the world. ” Nike “To bring innovation and inspiration to every athlete in the world. Mayo Clinic “The best care to every patient every day. ”

Examples: Vision Slogans Scotland Yard “To make London the safest major city in the world. ” Greenpeace “To halt environmental abuse and promote environmental solutions. ” Charles Schwab “To provide customers with the most useful and ethical financial services in the world. ”

Setting Objectives Phase 2 of the Strategy-Making Process • Purpose of setting objectives – Converts vision into specific performance targets – Creates yardsticks to track performance • Well-stated objectives are – S Specific – M Measurable – A Attainable – R Realistic – T Time-bound

Types of Objectives Required Financial Objectives Strategic Objectives Outcomes focused on improving financial performance Outcomes focused on improving competitive vitality and future business position $

Mc. Donald’s Financial and Strategic Objectives • Place more emphasis on delivering an exceptional customer experience • Add approximately 350 net new Mc. Donald’s restaurants • Reduce general and administrative spending as a percent of total revenues • Achievements – Systemwide sales and revenue growth of 3 -5% – Annual operating income growth of 6 -7% – Annual returns on incremental invested capital in high teens

Nissan’s Financial Objectives • Increase sales to 4. 2 million cars and trucks by 2008 (up from 3 million in 2003) • Cut purchasing costs 20% and halve the number of suppliers • Have zero net debt • Maintain a return on invested capital of 20% • Maintain a 10% or better operating margin

H. J. Heinz Company’s Financial and Strategic Objectives • Achieve 4 -6% sales growth, 7 -10% growth in operating income, EPS in the range of $2. 35 to $2. 45, and operating free cash flow of $900 million to $1 billion in fiscal 2006 • Pay dividends equal to 45 -50% of earnings • Increase focus on company’s 15 power brands and give top resource priority to those brands with number one and two market positions • Continue to introduce new and improved food products • Add to the Heinz portfolio of brands by acquiring companies with brands that complement existing brands • Increase sales in Russia, Indonesia, China, and India by 50% in fiscal year 2006 to roughly 6% of total sales • By end of fiscal 2008, derive approximately 50% of sales and profits from North America, 30% from Europe, and 20% from all other markers

Your Opinion Which matters most to a company’s future financial performance—setting and pursuing financial performance targets or setting and pursuing strategic performance targets? What arguments support your answer?

Objectives Are Needed at All Levels The process is more top-down than bottom up 1. First, establish organization-wide objectives and performance targets 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. Individual objectives are established last

Crafting a Strategy Phase 3 of the Strategy-Making Process • Strategy-making involves entrepreneurship – Actively searching for opportunities to do new things or – Actively searching for opportunities to do existing things in new or better ways • Strategizing involves – Developing timely responses to happenings in the external environment and – Steering company activities in new directions dictated by shifting market conditions

What Does Good Strategy Making Entail? Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts – – Out-innovating them Being more efficient Being more imaginative Adapting faster Rather than running with the herd!

Levels of Strategy-Making in 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

Implementing and Executing Strategy Phase 4 of the Strategy-Making Process • Operations-oriented activity aimed at performing core business activities in a strategy-supportive manner • Tougher and more time-consuming than crafting strategy • Key tasks include – Improving efficiency of strategy being executed – Showing measurable progress in achieving targeted results

Corporate Governance: Strategic Role of a Board of Directors • Exercise strong oversight to ensure five tasks of strategic management are executed to benefit – Shareholders or – Stakeholders • Make sure executive actions are not only proper but also aligned with interests of stakeholders

Evaluating a Company’s External Environment Mc. Graw-Hill/Irwin Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

“Analysis is the critical starting point of strategic thinking. ” Kenichi Ohmae

Understanding the Factors that Determine a Company’s Situation • Diagnosing a company’s situation has two facets – Assessing the company’s external or macro-environment • Industry and competitive conditions • Forces acting to reshape this environment – Assessing the company’s internal or micro-environment • Market position and competitiveness • Competencies, capabilities, resource strengths and weaknesses, and competitiveness

Fig. 3. 2: The Components of a Company’s Macroenvironment

Key Questions Regarding the Industry and Competitive Environment What are the industry’s dominant economic traits? How strong are competitive forces? What market positions do rivals occupy? What moves will they make next? What forces are driving change in the industry? What are the key factors for competitive success? How attractive is the industry from a profit perspective?

Fortune 500

Question 1: What are the Industry’s Dominant Economic Traits? • • • Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects

Question 2: What Kinds of Competitive Forces Are Industry Members Facing? • Objectives are to identify – Main sources of competitive forces – Strength of these forces • Key analytical tool – Five Forces Model of Competition

Fig. 3. 3: The Five Forces Model of Competition

Analyzing the Five Competitive Forces: How to Do It Step 1: Identify the specific competitive pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force -- fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits

Competitive Pressures Associated With Potential Entry • Seriousness of threat depends on – Size of pool of entry candidates and available resources – Barriers to entry – Reaction of existing firms

Competitive Pressures from Substitute Products Concept Substitutes matter when customers are attracted to the products of firms in other industries Examples è Sugar vs. artificial sweeteners è Eyeglasses and contact lens vs. laser surgery è Newspapers vs. TV vs. Internet

Competitive Pressures: Collaboration Between Sellers and Suppliers • Sellers are forging strategic partnerships with select suppliers to – Reduce inventory and logistics costs – Speed availability of next-generation components – Enhance quality of parts being supplied – Squeeze out cost savings for both parties • Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships

Competitive Pressures From Buyers and Seller-Buyer Collaboration • Whether seller-buyer relationships represent a weak or strong competitive force depends on – Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor – Extent and competitive importance of seller-buyer strategic partnerships in the industry

Competitive Pressures: Collaboration Between Sellers and Buyers • Partnerships are an increasingly important competitive element in business-to-business relationships • Collaboration may result in mutual benefits regarding – – Just-in-time deliveries Order processing Electronic invoice payments Data sharing • Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships

Strategic Implications of the Five Competitive Forces • Competitive environment is unattractive from the standpoint of earning good profits when – Rivalry is vigorous – Entry barriers are low and entry is likely – Competition from substitutes is strong – Suppliers and customers have considerable bargaining power

Strategic Implications of the Five Competitive Forces • Competitive environment is ideal from a profit-making standpoint when – Rivalry is moderate – Entry barriers are high and no firm is likely to enter – Good substitutes do not exist – Suppliers and customers are in a weak bargaining position

Coping With the Five Competitive Forces • Objective is to craft a strategy to – Insulate firm from competitive pressures – Initiate actions to produce sustainable competitive advantage – Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry

Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? • Industries change because forces are driving industry participants to alter their actions • Driving forces are the major underlying causes of changing industry and competitive conditions • Where do driving forces originate? – Outer ring of macroenvironment – Inner ring of macroenvironment

Analyzing Driving Forces: Three Key Steps STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years – Usually no more than 3 - 4 factors qualify as real drivers of change STEP 2: Assess impact – Are the driving forces acting to cause market demand for product to increase or decrease? – Are the driving forces acting to make competition more or less intense? – Will the driving forces lead to higher or lower industry profitability? STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces

Question 4: What Market Positions Do Rivals Occupy? • One technique to reveal different competitive positions of industry rivals is strategic group mapping • A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

Procedure for Constructing a Strategic Group Map STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Example: Strategic Group Map of Selected Retail Chains

Question 5: What Strategic Moves Are Rivals Likely to Make Next? • A firm’s best strategic moves are affected by – Current strategies of competitors – Future actions of competitors • Profiling key rivals involves gathering competitive intelligence about – – – Current strategies Most recent actions and public announcements Resource strengths and weaknesses Efforts being made to improve their situation Thinking and leadership styles of top executives

Question 6: What Are the Key Factors for Competitive Success? • KSFs are those competitive factors most affecting every industry member’s ability to prosper • KSFs concern – – – Specific strategy elements Product attributes Resources Competencies Competitive capabilities that a company needs to be competitively successful • KSFs are attributes that spell the difference between – Profit and loss – Competitive success or failure

Example: KSFs for Beer Industry • Full utilization of brewing capacity – to keep manufacturing costs low • Strong network of wholesale distributors – to gain access to retail outlets • Clever advertising – to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry • Appealing designs and color combinations – to create buyer appeal • Low-cost manufacturing efficiency – to keep selling prices competitive

Question 7: Does the Outlook for the Industry Present an Attractive Opportunity? • Involves assessing whether the industry and competitive environment is attractive or unattractive for earning good profits • Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits – Attractiveness is relative, not absolute – Conclusions about attractiveness have to be drawn from the perspective of a particular company