Chapter 1 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY-MAKING PROCESS FOR COMPETITIVE ADVANTAGE

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 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.

“If you don’t have a strategy you will be “If you don’t have a strategy you will be . . . part of somebody else’s strategy.” - Alvin Toffler 2010 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 of Walmart & Competitors Figure 1.1 2010 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.

Why do some organizations succeed while others fail? Strategy- a set of related actions managers take to increase company’s performance. 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 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.

Determinants of Shareholder Value Figure 1.2 To increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits. 2010 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.

Superior Performance “Maximizing shareholder value is the ultimate goal of profit making companies…” 2010 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.

Competitive Advantage “…results when a company’s strategies lead to superior performance compared to competitors 2010 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.

Sustained Competitive Advantage “A company’s… strategies enable it to maintain above average profitability for a number of years.” 2010 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.

Company’s Business Model “…a conception of how a set of strategies…mesh… (to) allow… company to gain competitive advantage and achieve superior profitability… Encompasses how the company will: 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 2010 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.

Differences in Industry Performance Profitability/Profit Growth: Overall performance of industry relative to other industries Company’s relative success in industry compared to competitors 2010 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.

ROI in Selected Industries (2004–2008) Figure 1.3 2010 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.

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 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 successful strategy gives potential donors a compelling message about why they should contribute.” 2010 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 Managers Corporate-Level Managers Business-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 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.

Levels of Strategic Management Figure 1.4 2010 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.

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. 2010 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.

Strategy Formulation & Implementation Figure 1.5 2010 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:  Mission Statement Provides framework within which strategies are formulated: Mission – Reason for existence – what an organization does Vision – Some desired future state Values – Key values an organization is committed to Major Goals – Measurable desired future state an organization attempts to realize 2010 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.

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? A company’s mission is best approached from a customer-oriented business definition. 2010 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.

Defining the Business Figure 1.6 Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7. 2010 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? The Vision 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!” 2010 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.

Values How managers and employees should conduct themselves How they should do business What kind of organization they need to build to help achieve company’s mission Organizational 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 2010 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.

In high-performance organizations, values respect the interests of key stakeholders. 2010 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.

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 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.

Major Goals Goal - precise/measurable desired future state a company attempts to realize. Well-constructed goals: Precise and measurable– provide yardstick or standard to judge performance Address crucial issues– a limited number of key goals helps maintain focus Challenging but realistic– provide employees with incentive for improving Specify time period– motivates/injects sense of urgency into goal attainment 2010 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.

 External Analysis Identifies strategic opportunities & threats in organization’s operating environment that will affect how it pursues its mission. 2010 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.

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 Legal International Technological 2010 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.  Internal Analysis Strengths= superior performance Weaknesses= inferior performance. Includes review of: Company’s resources & capabilities Company-specific competencies 2010 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.

 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 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.

 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 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. ⑥The Feedback Loop Strategic planning is ongoing. 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 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.

Criticisms of Formal Planning Model Unpredictability of real world Role lower-level managers can play Many strategies result of serendipity 2010 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.

Intended & Emergent Strategies Intended/Planned Strategies Strategies organization plans to implement Result of formal planning process Unrealized strategies are unprecedented changes & unplanned events after formal planning complete Emergent Strategies Unplanned responses to unforeseen circumstances Serendipitous discoveries/events emerge that open up unplanned opportunities Assess emergent strategy fits needs & capabilities Realized Strategies Intended strategies put into action & emergent strategies evolve 2010 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.

Emergent & Deliberate Strategies Figure 1.7 Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985. 2010 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 in Practice Formal planning has positive impact on performance-should include current/future competitive environments. Scenario Planning Recognizes the future unpredictable Develops strategies for future scenarios Decentralized Planning- Functional managers Avoids ivory tower approach Corporate-level planners = facilitators 2010 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 Scenario Planning Figure 1.8 Data Source: Value Line Investment Survey 2010 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 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 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: Strategic Leadership Good leaders of strategy-making process have key attributes: Vision, eloquence, and consistency Articulation of business model Commitment Well informed Willing to delegate or empower Astute use of power Emotional intelligence 2010 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.

“The essence of strategy lies in creating tomorrow’s competitive advantage faster than competitors mimic the ones you possess today.” - Gary Hamel & C. K. Prahalad 2010 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.