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1 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-1

2 WHAT IS STRATEGY AND WHY IS IT IMPORTANT? Chapter 1 Screen graphics created by: Jana F. Kuzmicki, PhD Troy University - Florida and Western Region

3 “Without a strategy the organization is like a ship without a rudder, going around in circles.” Quote... Joel Ross and Michael Kami

4 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-4 Chapter Outline What Is Strategy? What Does the Strategy-Making, Strategy-Executing Process Entail?  Phase 1: Developing a Strategic Vision  Phase 2: Setting Objectives  Phase 3: Crafting a Strategy  Phase 4: Implementing and Executing the Strategy  Phase 5: Evaluating Performance and Initiating Corrective Adjustments Corporate Governance: Role of Board of Directors in the Strategy-Making, Strategy-Executing Process Why Crafting and Executing Strategy Are Important Tasks

5 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-5 Thinking Strategically: The Three Big Strategic Questions Where are we now? Where do we want to go?  Business(es) to be in and market positions to stake out  Buyer needs and groups to serve  Outcomes to achieve How will we get there?

6 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-6 What Is Strategy? Consists of the combination of competitive moves and business approaches used by managers to run the company Management’s “game plan” to  Stake out a market position  Attract and please customers  Compete successfully  Conduct operations  Achieve target objectives

7 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-7 Making Strategic Choices — Deciding Between the Options Making Strategic Choices — Deciding Between the Options Trial-and-error organizational learning about  What has worked and  What has not worked Managerial analysis and strategic thinking about how best to proceed, given prevailing circumstances Management’s appetite for taking risks The strategic choices a company makes tend to be a product of...

8 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-8 An Example of Strategy: Comcast Roll out a new video-on-demand service to allow customers to watch TV programs at any time Partner with Sony, MGM, and others to expand Comcast’s library of movie offerings Continue to roll out high-speed Internet or broadband service to customers via cable modems Use “voice-over-Internet-protocol” (VOIP) technology to offer subscribers Internet-based phone at a fraction of the cost charged by other providers Use the video-on-demand and VOIP service offerings to  Differentiate Comcast’s service offering and  Combat competition from direct-to-home satellite TV providers Employ a sales force to sell advertising to businesses that were shifting some of their advertising dollars from sponsoring network programs to sponsoring cable programs Significantly improve Comcast’s customer service

9 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-9 Striving for Competitive Advantage Central thrust of a company’s strategy involves moves to strengthen a company’s  Long-term competitive position and  Financial performance Achieving a sustainable competitive advantage greatly enhances a company’s prospects for  Winning in the marketplace and  Earning above-average profits What separates a powerful strategy from an ordinary one is management’s ability to forge a series of moves, both in the marketplace and internally, that produce sustainable competitive advantage!

10 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Strategic Approaches to Building Competitive Advantage Strive to be the industry’s low-cost provider Differentiate the company’s product offering from rival brands in ways that customers find more appealing Focus on a narrow market niche, doing a better job than rivals of serving the unique needs of niche buyers Develop expertise, resource strengths, and capabilities not easily imitated by rivals

11 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Companies Pursuing Competitive Advantage Based on Distinctive Capabilities Sophisticated distribution systems – Wal-Mart Product innovation capabilities – 3M Corporation Complex technological process – Michelin Defect-free manufacturing – Toyota and Honda Specialized marketing and merchandising know-how – Coca-Cola Global sales and distribution capability – Black & Decker Superior e-commerce capabilities – Dell Computer Personalized customer service – Ritz Carlton Hotels

12 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 1.1: Identifying a Company’s Strategy

13 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 1.2: A Company’s Strategy Is Partly Proactive and Partly Reactive

14 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Why Do Strategies Evolve? Changes in a company’s strategy are typically necessary in order to respond and react to  Shifting market conditions  Evolving customer preferences  Fresh moves of competitors  Technological breakthroughs Strategy changes also make sense  When a strategy is performing poorly and needs to be “fixed”  When management comes up with ideas for improving the strategy Thus, a company’s strategy is always a work in progress!

15 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Linking Strategy With Ethics Ethical and moral standards are not governed by what is legal, but rather by  Issues of “right” vs. “wrong”  What one should do and “What is the right thing to do?” What makes a strategy “ethical”?  Actions that can pass moral scrutiny and that do not cross the line from “should do” to “should not do”  Actions and behaviors that are aboveboard in the sense of not being shady or unconscionable, injurious to others, or unnecessarily harmful to the environment Just keeping a company’s strategic actions within the bounds of what is legal does not mean its strategic actions are ethical!

16 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Role of Senior Executives in Ensuring the Strategy Is Ethical Forbid pursuit of ethically questionable business opportunities Insist all aspects of company strategy reflect high ethical standards Make it clear all employees are expected to act with integrity Install organizational checks and balances to  Monitor behavior  Enforce ethical codes of conduct  Provide guidance to employees in gray areas Display genuine commitment to conduct business activities ethically

17 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved What Does the Term “Business Model” Mean? A company’s business model is the storyline for how and why the company’s strategy will generate a revenue stream and entail a cost structure that produces attractive earnings and return on investment In other words, do the revenue-cost-profit economics of the strategy make good business sense? Without the ability to deliver good profits  The strategy is not viable  The survival of the business is in doubt  The company’s business model is sorely lacking and both the strategy and the business model have to be overhauled

18 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Strategy - Deals with a company’s competitive initiatives and business approaches Business Model - Concerns whether the revenues and costs flowing from the strategy are likely to generate attractive profits and return on investment, thus signifying whether the strategy and business model are viable Strategy Business Model Relationship Between Strategy and Business Model

19 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Microsoft’s Business Model Microsoft’s Business Model Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users Sell resulting OS and software packages to PC makers and users at relatively attractive prices and achieve large unit sales Most costs in developing software are fixed; variable costs are small - once breakeven volume is reached, revenues from additional sales are almost pure profit Provide technical support to users at no cost

20 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Redhat Linux’s Business Model Redhat Linux’s Business Model Rely on collaborative efforts of volunteer programmers to create the software; make source code open and available to all users Add value to free, downloadable version of Linux by offering users Red Hat Linux systems containing upgraded and tested features Charge a modest fee to those preferring to subscribe to Red Hat Linux version Make money by employing a cadre of technical support personnel who provide technical support to users for a fee Make as much or more money on providing technical support services, training, and consulting as on selling subscriptions to Red Hat Linux

21 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved What Makes a Strategy a Winner? How well does the strategy fit the company’s internal and external situation? Is the strategy helping the company achieve a sustainable competitive advantage? Is the strategy resulting in better company performance?

22 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Other Criteria for Judging the Merits of a Strategy Internal consistency and unity among all pieces of the strategy Degree of risk the strategy poses as compared to alternative strategies Degree to which the strategy is flexible and adaptable to changing circumstances While these criteria are relevant, they seldom override the importance of the three tests of a winning strategy!

23 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 1.3: The Strategy-Making, Strategy-Executing Process

24 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Developing a Strategic Vision Involves thinking strategically about  Future of company  Where are we going? Developing a strategic vision entails  Creating a roadmap of where the company is headed and why  Deciding what position the company needs to stake out in the marketplace  Providing long-term direction  Giving company a strong identity Phase 1 of the Strategy-Making Process

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26 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of a Strategic Vision Well-stated vision statements  Are distinctive and specific to a particular organization  Avoid generic language  Excite strong emotions  Are challenging, uncomfortable, nail biting

27 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-27

28 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1-28

29 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Strategic Visions Red Hat Linux To extend our position as the most trusted Linux and open source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management platform, and associated support and services. Wells Fargo We want to satisfy all of our customers’ financial needs, help them succeed financially, be the premier provider of financial services in every one of our markets, and be known as one of America’s great companies.

30 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Strategic Visions Hilton Hotels Corporation Our vision is to be the first choice of the world’s travelers. Hilton intends to build on the rich heritage and strength of our brands by: Consistently delighting our customers Investing in our team members Delivering innovative products and services Continuously improving performance Increasing shareholder value Creating a culture of pride Strengthening the loyalty of our constituents

31 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Strategic Visions Dental Products Division of 3M Corporation Become the supplier of choice to the global dental professional markets, providing world-class quality and innovative products. [All employees of the division wear badges bearing these words, and whenever a new product or business procedure is being considered, management asks “Is this representative of the leading dental company?”]

32 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Strategic Visions eBay Provide a global trading platform where practically anyone can trade practically anything. Black & Decker Corporation Establish the company as the preeminent global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems.

33 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A mission statement focuses on current business activities -- “who we are and what we do”  Current product and service offerings  Customer needs being served  Technological and business capabilities A strategic vision concerns a firm’s future business path -- “where we are going”  Markets to be pursued  Future technology- product-customer focus  Kind of company management is trying to create Mission vs. Strategic Vision

34 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of a Mission Statement Defines current business activities, highlighting boundaries of current business  Present products and services  Types of customers served Conveys  What we do,  Why we are here, and  Where we are now A company’s mission is not to make a profit! Its true mission is its answer to “What will we do to make a profit?” Making a profit is an objective or intended outcome!

35 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Trader Joe’s Mission Statement Our mission: To give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit. (a unique grocery store chain)

36 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Communicating the Strategic Vision An exciting, inspirational vision  Contains memorable language  Clearly maps company’s future direction  Challenges and motivates workforce  Provokes emotion and enthusiasm Winning support for the vision involves  Putting “where we are going and why” in writing  Distributing the statement organization-wide  Having executives explain the vision to the workforce

37 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples: Vision Slogans Levi Strauss & Company “We will clothe the world by marketing the most appealing and widely worn casual clothing in the world.” Microsoft Corporation “Empower people through great software— any time, any place, and on any device.” Mayo Clinic “The best care to every patient every day.”

38 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved 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.”

39 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Linking the Vision With Company Values A statement of values is often provided to guide a company’s pursuit of its vision Values -- Beliefs, business principles, and ways of doing things incorporated into  Company’s operations  Behavior of workforce Values statements  Contain between four and eight values  Are ideally tightly connected to and reinforce a company’s vision, strategy, and operating practices

40 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Example: Company Values Creating shareholder value Building strong relationships Entrepreneurial spirit Excellent customer service Giving back to the community Respect for all people Doing the right thing Taking care of people Home Depot

41 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved SafetyEthics Environmental stewardship Respect for people Du Pont Example: Company Values

42 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Setting Objectives Purpose of setting objectives  Converts vision into specific performance targets  Creates yardsticks to track performance  Pushes firm to be inventive, intentional, and focused in its actions Setting challenging, achievable objectives guards against  Complacency  Internal confusion  Status quo performance Phase 2 of the Strategy-Making Process

43 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Objectives Represent commitment to achieve specific performance targets Spell-out how much of what kind of performance by when Well-stated objectives are  Quantifiable  Measurable  Contain a deadline for achievement Establishing objectives converts the vision into concrete performance outcomes!

44 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Outcomes focused on improving financial performance Outcomes focused on improving long-term, competitive business position Financial Objectives Strategic Objectives $ Types of Objectives Required

45 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Annual dividend increases of X % Profit margins of X % X % return on capital employed (ROCE) Increased shareholder value Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investment Stable earnings during periods of recession Examples of Financial Objectives

46 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service Deriving X % of revenues from sale of new products introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening company’s brand name appeal Having stronger national or global sales and distribution capabilities than rivals Consistently getting new or improved products to market ahead of rivals Examples of Strategic Objectives

47 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Strategic Performance Fosters Better Financial Performance A company’s achievement of satisfactory financial performance, by itself, is not enough  Financial performance measures are “lagging indicators” reflecting results of past decisions and actions Of equal or greater importance is a company’s performance on measures of its strategic well-being — its competitiveness and market position  Strategic performance measures are “leading indicators” of a company’s future financial performance  Achievement of strategic performance targets  Signals growing competitiveness  Signals growing strength in the marketplace

48 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Balanced Scorecard Approach – Strategic and Financial Objectives Balanced scorecard approach for measuring company performance requires having and pursuing both  Financial objectives  Strategic objectives Emphasis on achieving financial objectives should generally assume priority over achieving strategic objectives when a company’s  Financial performance is dismal and/or  The company’s survival is threatened Otherwise, management is advised to put more emphasis on achieving strategic objectives that strengthen a company’s business position and give it a growing competitive advantage over rivals—Why? Because an ever stronger market position is a company’s surest path to improving its profitability!

49 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved 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 Nissan’s Strategic and Financial Objectives

50 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Narrow the retail price gap with major discounters (like Wal- Mart) and widen the price advantage over traditional supermarket competitors Use one-third of the company’s cash flow for debt reduction and two-thirds for stock repurchase and dividend payments Reduce operating and administrative costs by $500 million Leverage Kroger’s $51 billion size to achieve greater economies of scale Grow earnings per share by 10-12% in and by % annually starting in 2004 The Kroger Company’s Strategic and Financial Objectives

51 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved To achieve annual revenue growth of 5 to 6% and annual earnings-per-share growth averaging 10% Grow per-share profits faster than revenues by (a)Increasing productivity, (b)Selling enough new products each year that average prices and average margins rise, and (c)Using surplus cash to buy back shares Sell the company’s low-margin textiles and interiors division (with sales of $6.6 billion and operating profits of only $114 million) DuPont’s Financial and Strategic Objectives DuPont’s Financial and Strategic Objectives

52 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Achieve earnings per share in the range of $2.15-$2.25 in 2004 Increase operating cash flow by 45% to $750 million Reduce net debt by $1.3 billion in 2003 and further strengthen the company’s balance sheet in 2004 Continue to introduce new and improved food products Remove the clutter in the company product offerings by reducing the number of SKUs Increase spending on trade promotion and advertising by $200 million to strengthen the recognition and market shares of the company’s core brands Divest non-core underperforming product lines Heinz’s Financial and Strategic Objectives

53 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Solidify the company’s #1 position in the overall market for hard-disk drives Get more Seagate drives into popular consumer electronics products (i.e. video recorders) Take share away from Western Digital in providing disk drives for Microsoft’s Xbox Capture a 10% share of the market for 2.5-inch hard drives for notebook computers by 2004 Seagate Technology’s Strategic Objectives

54 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved To achieve long-term sales growth of 5 to 8% organic plus 2 to 4% from acquisitions Annual growth in earnings per share of 10% or better, on average A return on stockholders’ equity of 20 to 25% A return on capital employed of 27% or better To double the number of qualified new 3M product ideas and triple the value of products that win in the marketplace To have at least 30% of sales come from products introduced in the past four years To build the best sales and marketing organization in the world 3M Corporation’s Financial and Strategic Objectives

55 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Short-Term vs. Long-Term Objectives Short-term objectives  Targets to be achieved soon  Milestones or stair steps for reaching long-range performance Long-term objectives  Targets to be achieved within 3 to 5 years  Prompt actions now that will permit reaching targeted long-range performance later

56 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved 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!

57 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Strategic Intent Indicates a firm’s intent to  Stake out a particular business position over the long-term  Be a winner in marketplace Involves establishing a grandiose performance target  Out of proportion to its immediate capabilities and market position and  Devoting the company’s full resources and energies to achieving the target over time Signals relentless commitment to achieving a particular market position and competitive standing

58 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Objectives Are Needed at All Levels Objective-setting process is mostly top-down, not bottom-up! First, establish organization-wide objectives and performance targets Next, set business and product line objectives Then, establish functional and departmental objectives Individual objectives are established last

59 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Crafting a Strategy Strategy-making involves entrepreneurship – searching for opportunities  To do new things or  To do existing things in new or better ways Strategizing involves  Picking up on happenings in the external environment and  Steering company activities in new directions dictated by shifting market conditions Phase 3 of the Strategy-Making Process

60 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved The Hows That Define a Firm's Strategy How to grow the business How to please customers How to outcompete rivals How to respond to changing market conditions How to manage each functional piece of the business and develop needed organizational capabilities How to achieve strategic and financial objectives Strategy is HOW to...

61 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Activities Involved in Crafting a Strategy Studying market trends and actions of competitors Listening to customers, anticipating their changing needs Scrutinizing business possibilities based on new technology Building a firm’s market position via acquisitions or new products Pursuing ways to strengthen firm’s competitive capabilities Our strategy will be...

62 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts –  Outinnovating them  Being more efficient  Being more imaginative  Adapting faster – rather than running with the herd! Where Do Strategies Come From?

63 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Who Participates in Crafting a Company’s Strategy? Chief executive officer - CEO Senior corporate executives Chief financial officer - CFO Managers of business divisions and major product lines Key VPs for production, marketing, human resources, and other functional departments Every company manager has a strategy-making, strategy-executing role – ranging from minor to major – for the area he or she heads!

64 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Strategizing: An Individual or Team Responsibility? Teams are increasingly used because  Finding market- and customer-driven solutions is necessary  Complex strategic issues cut across functional areas and departmental units  Ideas of people with different backgrounds and experiences strengthen strategizing effort  Groups charged with crafting the strategy often include the people charged with implementing it

65 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 1.4: A Company’s Strategy-Making Hierarchy

66 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Levels of Strategy-Making in a Diversified Company Corporate Strategy Business Strategies Functional Strategies Operating Strategies Two-Way Influence Corporate-Level Managers Business-Level Managers Functional Managers Operating Managers

67 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Levels of Strategy-Making in a Single-Business Company Business Strategy Two-Way Influence Functional Strategies Operating Strategies Business-Level Managers Operating Managers Functional Managers Two-Way Influence

68 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Tasks of Corporate Strategy Moves to achieve diversification Actions to boost performance of individual businesses Capturing valuable cross-business synergies to provide = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses

69 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Initiating approaches to produce successful performance in a specific business Crafting competitive moves to build sustainable competitive advantage Developing competitively valuable competencies and capabilities Uniting strategic activities of functional areas Gaining approval of business strategies by corporate-level officers and directors Tasks of Business Strategy

70 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Game plan for a strategically-relevant function, activity, or business process Detail how key activities will be managed Provide support for business strategy Specify how functional objectives are to be achieved Tasks of Functional Strategies

71 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Tasks of Operating Strategies Concern narrower strategies for managing grassroots activities and strategically-relevant operating units Add detail to business and functional strategies Delegation of responsibility to frontline managers

72 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A firm’s strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy All the various strategic initiatives must be unified into a cohesive, company-wide action plan Pieces of a firm’s strategy should fit together like the pieces of a puzzle Uniting the Company’s Strategy-Making Effort

73 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Its strategic vision and business mission Its strategy Its strategic and financial objectives What Is a Strategic Plan? A Company’s Strategic Plan Consists of

74 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Action-oriented, operations-driven activity aimed at shaping performance of core business activities in a strategy-supportive manner Tougher and more time- consuming than crafting strategy Key tasks include  Improving efficiency of the strategy being executed  Showing measurable progress in achieving targeted results Phase 4 of the Strategy-Making Process Implementing and Executing Strategy

75 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Building a capable organization Creating a strategy-supportive corporate culture Allocating resources to strategy-critical activities Establishing strategy-supportive policies Instituting best practices and programs for continuous improvement Installing information, communication, and operating systems Motivating people to pursue the target objectives Tying rewards to achievement of results Exerting the leadership necessary to drive the process forward and keep improving What Does Implementing and Executing the Chosen Strategy Involve?

76 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Involves creating strong “fits” between strategy and  Organizational capabilities  Organization’s work climate and culture  Reward structure  Internal operating systems The stronger the “fits” the  Better the execution  Higher a company’s odds of achieving its performance targets Characteristics of Good Strategy Execution

77 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Tasks of crafting and implementing the strategy are not a one-time exercise  Customer needs and competitive conditions change  New opportunities appear; technology advances; any number of other outside developments occur  One or more aspects of executing the strategy may not be going well  New managers with different ideas take over  Organizational learning occurs All these trigger the need for corrective actions and adjustments on an as-needed basis Evaluating Performance and Making Corrective Adjustments Phase 5 of the Strategy-Making Process

78 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Taking actions to adjust to the march of events tends to result in one or more of the following  Altering long-term direction and/or redefining the mission/vision  Raising, lowering, or changing performance objectives  Modifying the strategy  Improving strategy execution Monitoring, Evaluating, and Adjusting as Needed

79 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Exercise strong oversight to ensure the 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 Corporate Governance: Strategic Role of a Board of Directors

80 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Obligations of a Board of Directors Be inquiring critics and overseers Evaluate caliber of senior executives’ strategy- making and strategy-executing skills Institute a compensation plan for top executives rewarding them for results that serve interests of  Stakeholders and  Shareholders Oversee company’s financial accounting and reporting practices

81 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Be well-informed about a company’s performance Guide and judge the CEO and other top executives Display courage to curb management actions it believes are inappropriate or unduly risky Certify to shareholders the CEO is fulfilling expectations of board Provide insight and advice to management Intensely involved in debating pros and cons of key decisions and actions Key Responsibilities: Board of Directors

82 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Good Corporate Governance Matters The whole fabric of effective corporate governance is undermined when boards of directors shirk their responsibility to maintain ultimate control over  Company’s strategic direction  Major elements of a company’s strategy  Business approaches management is using to implement and execute the strategy Board members are obligated to rein in a CEO who oversteps the bounds of sound business principles and ethical behavior  A rubber stamp board abdicates its responsibility to shareholders Boards of directors have a very important oversight role in the strategy-making, strategy-executing process!

83 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Why Is Strategy Important? A compelling need exists for managers to proactively shape how a firm’s business will be conducted A strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary

84 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Good Strategy + Good Strategy Execution = Good Management Crafting and executing strategy are core management functions Nothing affects a company’s ultimate success or failure more fundamentally than how well its management team  Charts the company’s direction  Develops competitively effective strategic moves and business approaches  Pursues what needs to be done internally to produce good day-in/day-out strategy execution Excellent execution of an excellent strategy is the best test of managerial excellence – and the most reliable recipe for winning in the marketplace!

85 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Good strategic thinking and management of the strategy-making, strategy-executing process  Guides entire firm regarding “what it is we are trying to do and to achieve”  Helps unify numerous strategy-related decisions across the company  Creates a proactive atmosphere  Promotes development of an evolving business model focused on bottom-line success  Provides basis for determining how best to allocate company resources Benefits of a “Strategic Approach” to Managing


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