Strategy: Chapter 2

Front 1

I. WHAT DOES MAKING AND EXECUTING STRATEGY ENTAIL

5 Phases of Making & Executing Strategy:

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1) Developing a strategic vision of where company needs to head and what its future product/market/customer technology focus should be.
2) Setting objectives and using them as yardsticks for measuring the company’s performance and progress.
3) Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted.
4) Implementing and executing the chosen strategy efficiently and effectively.
5) Evaluating performance and initiating corrective adjustments in the company’s long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas and new opportunities.

Revise as needed in light of actual performance, changing conditions, new opportunities and new ideas.

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II. PHASE 1: DEVELOPING A STRATEGIC VISION

Back 2

What path should the company take?
What changes in the company’s product/market/customer/technology focus would improve its market condition and future prospects?
Where are we going? Why is it good for the business?

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Strategic Vision:

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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.

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Factors to consider when deciding on a strategy:
External

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 Positive outlook with maintenance of current strategy?
 Attractive growth opportunities
 Future industry changes that will strengthen/weaken company’s prospects
 New customer groups/geographic markets
 Emerging market opportunities
 Abandonment of any markets, segments or customer groups

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Factors to consider when deciding on a strategy:
Internal

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 Ambitions
 Industry standing
 Present business – generate sufficient growth/profitability in future
 Organizational strengths to leverage (new products/services/new business)
 Resources (don’t stretch too thin)
 Technological focus (too board or too narrow)

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Well-conceived visions are:

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 Distinctive
 Specific to a particular organization
 Functions as a valuable management tool:
1) Provides understanding of what management wants business to look like
2) Provides managers with a reference point in making strategic decisions and preparing company for the future
 Must say something definitive about how company leaders intend to position company beyond current position.
 Graphic – paint a clear picture
 Directional – forward-looking, lists kinds of changes
 Focused – specific enough
 Flexible – adjustable
 Feasible – in terms of time
 Desirable – good business sense, long-term interest of stakeholders?
 Easy to communicate – explainable in 5-10 min. and reducible to a memorable slogan

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Common Shortcomings are:

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 Vague or incomplete
 Not-forward-looking – doesn’t talk about how
 Too broad
 Bland or uninspiring
 Not distinctive
 Too reliant on superlatives – doesn’t say anything about strategic course beyond lofty accolades

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A. Strategic Vision Covers Different Ground then the Typical Mission Statement

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 Typical mission statement tells “who we are, what we do and why we’re here”
provides brief overview of company’s present business purpose and raison d’etre, geography standing in the market,
products/services, buyers seeking to satisfy, customer groups, and tech/business capabilities BUT does NOT say anything
about the future.
 Typical mission statement sometimes called a “business purpose”

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B. Communicating the Strategic Vision
Why is it important? To get employees to:

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 Believe senior management knows where it’s trying to take the company
 Understand what changes lie ahead externally and internally
 To get employees to rally behind managerial efforts to get org moving in intended direction

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Present it in a way that:

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 Reaches out and grabs people
 Motivates people
 Provokes positive support and excitement

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Important Elements of Communication the Strategy

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1) Express the essence of the vision in a slogan – capture vision in an easily remembered slogan
2) Break down resistance to a new strategic vision – need compelling rationale to mobilize support and win commitment.
3) Recognize strategic inflection points – what to do to sustain success, how to avoid disaster, don’t miss out
4) Understand the Payoffs of a Clear Vision Statement

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4) Understand the Payoffs of a Clear Vision Statement

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 Crystallizes senior exec’s views about long-term direction
 Reduces the risk of rudderless decision-making
 Tool for winning support of org members for internal changes to help make vision a reality
 Provides a beacon for low-level managers in forming departmental missions, objectives and strategies (in sync)
 Helps organization prepare for the future

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Values:

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Beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company’s business and pursuing is strategic vision and strategy.

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C. Linking the Vision/Mission with Company Values

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 Examples: Fair treatment, integrity, ethical behavior, innovation, teamwork, top-notch quality, superior customer service, social responsibility, and community citizenship.
 Company must display and mirror values in their actions
 Acronyms are easy ways to remember values
 Window-dressing values: sound nice as lip service by top execs but have little impact on behavior or operations.
 Long-standing values = deep entrenchment in company culture, consistent with values in all endeavors
 New companies = weaker/incomplete sets of values, management decides what values, behaviors, conduct should characterize the company and will help drive vision and strategy

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Objectives

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An organization’s performance targets – the results and outcomes management wants to achieve. Yardsticks for measuring how well the organization is doing.

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Well-stated objectives are:

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 Quantifiable/measurable
 Finite – contain a deadline for achievement
 Concrete
 How much of what kind by when

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STRETCH OBJECTIVES

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effective way for avoiding ho-hum results by stretching an org to perform at its full potential and deliver best possible results
Use compensation incentives!!!

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You need a well-balanced scorecard.

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Two types of performance yardsticks are required:
1) Financial Performance
2) Strategic Performance

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Types of Financial Objectives

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 % increase in annual revenues
 % increases in after-tax profits
 % increases in earnings per share
 Increases in dividends
 Larger profit margins
 % return on capital employed (ROCE) or return on equity (ROE)
 Increased shareholder value
 Strong bond and credit ratings
 Sufficient internal cash flows to fund new investment
 Stable earnings during periods of recession

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Types of Strategic Objectives:

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 Winning % market share
 Achieving lower overall costs than rivals
 Overtaking key competitiors on product performance, quality or customer service
 Getting % of revenues from sale of new products introduced within first 5 years
 Achieving technological leadership
 Having a better product selection than rivals
 Strengthening company’s brand name appeal
 Having stronger national or global sales and distribution capabilities then rivals
 Consistently getting new or improved products to market ahead of rivals

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lagging indicators

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 Financial performance measures are lagging indicators

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leading indicators

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 Strategic outcomes are leading indicators

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Increased Strategic Performance = Better Financial Performance

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 Relentlessly pursue strategic outcomes that strengthen the company’s market position and produce a growing competitive advantage over rivals!!!!

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Both Short-Term and Long-Term Objectives are needed:

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 Immediate performance and what to do now to improve later performance

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Strategic Intent:

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When a company relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective.
 Craft potent offensive strategies to throw off competitors

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Need Objectives at all Levels

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 Break them down into performance targets for all org levels
 Top-down process with objectives that support achievement of companywide objectives
1) Helps produce cohesion among the objectives and strategies among different parts of org
2) Helps unify internal efforts to move the company along chosen path

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IV. PHASE 3: CRAFTING A STRATEGY
Entails answering:

Back 27

 How to grow the business
 How to please customers
 How to out compete rivals
 How to respond to changing market conditions
 How to manage each functional piece of the business & develop competencies and capabilities
 How to achieve strategic and financial objectives

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Master strategies come partly by:

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 Doing things differently where it counts – outinnovating them
 Being more efficient
 Being more imaginative
 Adapting faster – rather than running with the herd

Good strategy making is inseparable from good business entrepreneurship!

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A. Who participates in crafting a company’s strategy?

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 CEO – ultimate responsibility for leading the strategy-making, strategy-executing process; chief visionary, chief architect
 Senior Execs – manage the strategy for their own departments (i.e. production, marketing, etc.)
 Every company manager – has a strategic role
 Crafting and executing strategy is a team effort in which ever manager has a role for the are he or she heads. It is flawed thinking to view crafting and executing strategy as something only high-level managers do.
 Corporate intrapreneurs – give them the room to pursue new strategic initiatives and test out new ideas

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B. Company’s Strategy-Making Hierarchy
Four levels of strategy:

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 Corporate Strategy
 Business Strategy
 Functional-Area Strategies
 Operating Strategies

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 Corporate Strategy

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- Companywide game plan
- Establish business positions in different industries
- Cross-business synergies to develop competitive advantage

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 Business Strategy

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- Increases the performance of one specific line of business
- Crafting responses to changing market conditions and acting to strengthen market position
- Build advantage
- Strengthen competitive capabilities
- Oversee lower-level strategies
- Get major business-level strategies approved by corporate-level officers

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 Functional-Area Strategies

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- Actions, approaches, and practices to be employed business processes, functions or activities
- Support the company’s overall business strategy and competitive approach (OVERALL GOAL)

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 Operating Strategies

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- Add detail and completeness to business and functional strategy
- Provide a game plan for managing specific lower-echelon activities with strategic significance

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A single-business enterprise has THREE levels of strategy

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: 1) Business Strategy (companywide), 2) Functional-Area Strategies, 3) Operating Strategies

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C. Uniting the Strategy-Making Effort

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 Requires leadership from the top to: 1) Provide direction 2) Articulate key strategic themes
 Lower-level managers must understand long-term direction and major components of the overall and business strats
 Company strategy is at full power only when its many pieces are united
 Less potential for strategy conflict with united cohesion

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 Two things top-level execs can do to drive strategy down:

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1) Effectively communicate the company’s vision, objectives and major strategy to lower managers and personnel
2) Exercise due diligence in reviewing lower-level strategies for consistency and support of higher-level strategies

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Strategic Plan

Back 38

lays out the company’s future direction, performance targets, and strategy.

A Strategic Vision + Objectives + Strategy = Strategic Plan

 Rare to put strategic plans in writing, usually in the minds of execs

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V. PHASE 4: IMPLEMENTING AND EXECUTING THE STRATEGY

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Operations-oriented, make things happen, in a strategic-supportive manner
 Most demanding and time-consuming part of the process
 Tests manager’s ability to direct organizational change, motivate people, build and strengthen company competencies and competitive capabilities, create and nurture a strategy-supportive work climate and meet or beat performance targets

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V. PHASE 4: IMPLEMENTING AND EXECUTING THE STRATEGY

 Includes the following principle aspects:

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1) Staffing org with needed skills and expertise, consciously building and strengthening; org. work effort
2) Allocating ample resources to activities critical to strategic success
3) Ensuring policies and procedures facilitate strategy
4) Using best practices to perform core business activities; reassess periodically
5) Install info and operating systems that enable co. personnel to better carry out strategic roles
6) Motivate people to pursue the target objectives energetically
7) Tying rewards and incentives directly to achievement of performance objectives and good strategy execution
8) Creating a company culture and work climate conducive to successful strategy execution
9) Exerting internal leadership needed to drive implementation forward and keep improving; rectify stumbling blocks in a timely and effective fashion
 Pursue operational excellence

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V. PHASE 5: EVALUATE PERFORMANCE AND INITIATE CORRECTIVE ADJUSTMENTS

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Trigger point for deciding whether to continue or change strategy
 Managing strategy is an ongoing process, not an every-now-and-then task.

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VI. CORPORATE GOVERNANCE: THE ROLE OF THE BOARD OF DIRECTORS
It’s the duty of the board to exercise strong oversight over the process. They have FOUR obligations:

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1) Be inquiring critics and oversee the company’s direction, strategy, and business approaches
2) Evaluate the caliber of senior executive’s strategy-making and strategy-executing skills
3) Institute a compensation plan for top execs that rewards them for actions and results that serve stakeholder interests, and most especially those of shareholders.
4) Oversee the company’s financial accounting and financial reporting practices.