Chapter 1 LEADERSHIP, STRATEGY, AND COMPETITIVE ADVANTAGE Theory of Strategic Management Hill Jones

Learning Objectives Explain “competitive advantage” Discuss strategic role of managers at different levels of organization Identify steps in strategic planning process Discuss pitfalls of planning and how they can be avoided Identify cognitive biases that lead to poor strategic decisions & explain how they can be avoided Discuss role of strategic leaders in the strategy- making process 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-2

“If you don’t have a strategy you will be... part of somebody else’s strategy.” 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Alvin Toffler

Profitability of Walmart & Competitors 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-4 Figure 1.1

Why do some organizations succeed while others fail? Strategic Leadership- Effectively managing a company’s strategy-making process Strategy Formulation- Determining & selecting strategies Strategy Implementation- Putting strategies into action to improve company’s efficiency & effectiveness 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-5 Strategy- a set of related actions managers take to increase company’s performance.

Determinants of Shareholder Value 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-6 To increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits. Figure 1.2

Superior Performance “Maximizing shareholder value is the ultimate goal of profit making companies…” Reasons: 1.Provide risk capital 2.Legal owners of the company 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-7

Shareholders value The returns that shareholders earn from purchasing shares in a company Returns come from two sources: 1.capital appreciation in the value of a company’s share 2.Dividend payments 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1-8

Competitive Advantage “…results when a company’s strategies lead to superior performance compared to competitors 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-9

Sustained Competitive Advantage “A company’s… strategies enable it to maintain above average profitability for a number of years.” 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-10

Company’s Business Model 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Encompasses how the company will: “…a conception of how a set of strategies…mesh… (to) allow… company to gain competitive advantage and achieve superior profitability… Select customers Define/differentiate product offerings Create value for customers Acquire/keep customers Produce goods/services Lower costs Deliver goods/services to market Organize activities within company Configure its resources Achieve/sustain a high profitability Grow business over time

Differences in Industry Performance 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Profitability/Profit Growth:  Overall performance of industry relative to other industries  Company’s relative success in industry compared to competitors

ROI in Selected Industries (2004–2008) 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Figure 1.3

Performance in Nonprofit Enterprises Nonprofit entities= government agencies, universities, charities: – Not in business to make a profit – Still need to use resources efficiently & effectively – Must meet goals – Set strategies to achieve goals and compete with other nonprofits for scarce resources 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-14

“A successful strategy gives potential donors a compelling message about why they should contribute.” 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-15

Strategic Managers Corporate-Level Managers – Oversee development of strategies for whole organization – CEO is principle general manager who consults with other senior executives Business-Level Managers – Responsible for business unit that provides product/service to particular market Functional-Managers – Supervise particular function/operation (e.g. marketing, operations, accounting, human resources) 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-16

Levels of Strategic Management 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Figure 1.4

Strategy-Making Process  Select corporate mission & major corporate goals.  Analyze external competitive environment to identify opportunities/threats. Analyze organization’s internal environment to identify strengths/weaknesses.  Select strategies that: Build on organization’s strengths and correct weaknesses– to take advantage of external opportunities & counter external threats Are consistent with organization’s mission and major goals Are congruent and constitute a viable business model  Implement the strategies South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-18

Strategy Formulation & Implementation 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Figure 1.5

 Mission Statement 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Provides framework within which strategies are formulated: oMission – Reason for existence – what an organization does oVision – Some desired future state oValues – Key values an organization is committed to oMajor Goals – Measurable desired future state an organization attempts to realize

The Mission What is it 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? 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use A company’s mission is best approached from a customer-oriented business definition.

Defining the Business 1-22 Figure 1.6 Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.

The Vision 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use What would 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 but powerful vision: “If it can go mobile, it will!”

Values 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use oHow managers and employees should conduct themselves oHow they should do business oWhat kind of organization they need to build to help achieve company’s mission oOrganizational culture Set of values, norms, and standards that control how employees work to achieve organization’s mission and goals Often seen as an important source of competitive advantage

In high-performance organizations, values respect the interests of key stakeholders South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-25

Values at Nucor  “Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.”  “Employees should be able to feel confident that if they do their jobs properly, they will have a job tomorrow.”  “Employees have the right to be treated fairly and must believe that they will be.”  “Employees must have an avenue of appeal when they believe they are being treated unfairly.” 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-26

Major Goals Well-constructed goals: 1.Precise and measurable– provide yardstick or standard to judge performance 2.Address crucial issues– a limited number of key goals helps maintain focus 3.Challenging but realistic– provide employees with incentive for improving 4.Specify time period– motivates/injects sense of urgency into goal attainment 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Goal - precise/measurable desired future state a company attempts to realize.

 External Analysis 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Identifies strategic opportunities & threats in organization’s operating environment that will affect how it pursues its mission.

External Analysis Requires assessment of: Industry environment – Competitive structure of industry – Competitive position of the company – Competitiveness and position of major rivals Country/national environments in which company competes Wider socioeconomic/macroenvironment that may affect company and its industry Social Governmental 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Legal International Technological

 Internal Analysis Includes review of: Company’s resources & capabilities Company-specific competencies 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Strengths= superior performance Weaknesses= inferior performance.

 SWOT Analysis and Business Model SWOT analyses identifies strategies that align company resources/capabilities to environment to create/sustain competitive advantage. Functional strategies should be consistent with & support company business level/global strategies. – Functional-level strategy – directed at operational effectiveness – Business-level strategy – overall competitive theme – Global strategy – expand/grow/prosper at global level – Corporate-level strategy – maximize profitability & profit growth 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-31

 Strategy Implementation Managers put strategies into action: – Implementation/execution of strategic plans – Design best organization structure, culture, control systems – Governance system for legal/ethical compliance – Consistency with maximizing profit & profit growth 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-32

⑥ The Feedback Loop  Monitor strategy execution: Determine strategic goals/objectives being achieved Evaluate competitive advantage is being created & sustained  Monitor/reevaluate for the next round of strategy formulation/implementation 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Strategic planning is ongoing.

Criticisms of Formal Planning Model 1)Unpredictability of real world 2)Role lower-level managers can play 3)Many strategies result of serendipity 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-34

Intended & Emergent Strategies 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use oIntended/Planned Strategies oStrategies organization plans to implement oResult of formal planning process oUnrealized strategies are unprecedented changes & unplanned events after formal planning complete oEmergent Strategies oUnplanned responses to unforeseen circumstances oSerendipitous discoveries/events emerge that open up unplanned opportunities oAssess emergent strategy fits needs & capabilities oRealized Strategies oIntended strategies put into action & emergent strategies evolve

Emergent & Deliberate Strategies 1-36 Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June Figure 1.7

Strategic Planning in Practice Scenario Planning Recognizes the future unpredictable Develops strategies for future scenarios Decentralized Planning- Functional managers Avoids ivory tower approach Corporate-level planners = facilitators 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Formal planning has positive impact on performance- should include current/future competitive environments.

Scenario Planning 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Data Source: Value Line Investment Survey Figure 1.8

Strategic Decision Making Companies may adopt poor strategies if groupthink or individual cognitive biases allowed to intrude into decision- making process.  Cognitive biases: Rules of thumb result in errors  Groupthink: Decision makers embark on course of action without questioning underlying assumptions 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. 1-39

Strategic Leadership  Vision, eloquence, and consistency  Articulation of business model  Commitment  Well informed  Willing to delegate or empower  Astute use of power  Emotional intelligence 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Good leaders of strategy-making process have key attributes:

“The essence of strategy lies in creating tomorrow’s competitive advantage faster than competitors mimic the ones you possess today.” 2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use Gary Hamel & C. K. Prahalad