Chapter 1 Strategic Leadership: Managing the Strategy- Making Process for Competitive Advantage

Learning Objectives Explain what is meant by competitive advantage Discuss the strategic role of managers at different levels within the organization Identify the primary steps in a strategic planning process Discuss the common pitfalls of planning and how those pitfalls can be avoided

Learning Objectives Outline the cognitive biases that might lead to poor strategic decisions, and explain how these biases can be overcome Discuss the role strategy leaders play in the strategy-making process

strategy Set of related actions that managers take to increase their company’s performance Strategic leadership: Creating competitive advantage through effective management of the strategy-making process Strategy formulation: Selecting strategies based on analysis of an organization’s external and internal environment Strategy implementation: Putting strategies into action

Figure 1.2 - determinants of shareholder value

Superior performance Risk capital: Equity capital for which there is no guarantee that stockholders will: Recoup their investment Earn a decent return Shareholder value: Returns that shareholders earn from purchasing shares in a company Sources Capital appreciation in the value of a company’s shares Dividend payments

Superior performance Profitability: Return a company makes on the capital invested in the enterprise Return on invested capital (ROIC) - Net profit over the capital invested in a firm Result of how efficiently the capital is used to satisfy customer needs Profit growth: Increase in net profit over time, achieved by: Selling products in rapidly growing markets Gaining market share from rivals

Superior performance Selling more to existing customers Expanding overseas or diversifying into new businesses To boost profitability and profit growth, managers must: Use strategies to give their company a competitive advantage over rivals Deliver high profitability and sustainable profit growth

Competitive advantage Occurs when a company’s profitability is greater than the average profitability of firms in its industry Sustained competitive advantage: A company’s strategies enable it to maintain above-average profitability for a number of years

BUSINESS MODEL Conception of how strategies should work together as a whole to enable the company to achieve competitive advantage Deals with how a company: Selects, acquires, and keeps its customers Defines and differentiates its product offerings Creates value for its customers Produces goods or services and delivers to the market Lowers costs and organizes its resources and activities Achieves and sustains high profitability and growth

Figure 1.3 - return on invested capital (roic) in selected industries, 2002-2011 Source: Value Line Investment Survey.

Strategic management General managers Bear responsibility for a company’s overall performance or for one of its major self-contained subunits or divisions General managers Responsible for supervising a particular function, task, activity, or operation Functional managers Competes in several different businesses and has a separate self-contained division to manage each Multidivisional company

Figure 1.4 - levels of strategic management

Corporate-level managers Oversee the development of strategies for the entire organization Provide a link between people concerned with the firm’s strategic development and the shareholders Ensure that business strategies pursued by the company are consistent with maximizing profitability and profit growth

Business-level managers Heads of business units Business unit: Self-contained division that provides a product or service for a particular market Translate statements of intents into concrete strategies for individual businesses Are concerned with strategies specific to a particular business

Functional- level managers Responsible for specific business functions Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers Provide information that helps formulate realistic and attainable strategies

Steps in a formal strategic planning process Select the corporate mission and goals Analyze the organization’s external competitive environment and internal operating environment Select strategies that: Build on the organization’s strengths and correct it’s weaknesses Are consistent with the organization’s mission and goals Are congruent and constitute a viable business model Implement the strategies

Main components of the strategic planning process Existing Business Model Mission, Vision, Values, and Goals External Analysis: Opportunities and Threats SWOT Strategic Choice Strategies: Functional, Business, Global, and Corporate-Level Governance and Ethics Designing Organization Structure Designing Organization Culture Designing Organization Controls Internal Analysis: Strengths and Weaknesses Feedback Strategic Formulation Strategic Implementation

Components of a Mission statement Purpose of the company, or a statement of what the company strives to do Mission Articulation of a company’s desired achievements or future state Vision Statement of how employees should conduct themselves and their business to help achieve the company mission Values Goal - Precise and measurable desired future state that a company attempts to realize Establishing major goals

Figure 1.6 - defining the business

External and internal analysis External analysis - Identifies strategic opportunities and threats that will affect how an organization pursues its mission Involves examination of the: Industry environment in which the company operates Country or national environment Macroenvironment Internal analysis - Focuses on reviewing the resources, capabilities, and competencies of a company Goal - Identify the company’s strengths and weaknesses

SWOT analysis Comparison of strengths, weaknesses, opportunities, and threats Purpose - Identify the strategies to: Exploit external opportunities Build on and protect company strengths Eradicate weaknesses and counter threats Goal - Affirm a company-specific business model To align, fit, or match a company’s resources and capabilities to the demands of its environment

SWOT strategies Functional-level strategies - Directed at improving the effectiveness of operations within a company Business-level strategies - Encompass the business’s overall competitive theme How it positions itself in the marketplace to gain a competitive advantage Different position strategies that can be used in different industry settings

SWOT strategies Global strategies - Address how to expand operations outside the home country Since competitive advantage is determined at a global level Corporate-level strategies - Determine: The businesses a company should be in to maximize profitability and profit growth How to gain a competitive edge

Strategy implementation and feedback loop Taking action at the functional, business, and corporate levels to execute a strategic plan Designing the best organization structure, culture, and control systems to put a chosen strategy into action Feedback loop - Provide information to the corporate level on the: Strategic goals that are being achieved Degree of competitive advantage being created and sustained

Criticisms of Formal Planning Models Unforeseen circumstances can adversely affect strategic plans Excessive importance is attached to the role of top management While ignoring lower-level managers Many successful strategies are a result of serendipity rather than strategic planning

Figure 1.7 - emergent and deliberate strategies

Figure 1.8 - scenario planning

Scenario planning Formulating plans that are based on “what-if” scenarios about the future Encourages managers to: Think outside the box and be more flexible Anticipate probable scenarios Ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation

Cognitive Biases and Strategic Decision Making Systematic errors in human decision making Arise from the way people process information Cognitive biases Decisions are made based on prior beliefs, even when evidence proves that those beliefs are wrong Prior hypothesis bias Decision makers, having committed significant resources to a project, commit even more, despite receiving feedback that the project is failing Escalating commitment Use of simple analogies to make sense out of a complex problem Reasoning analogy

Cognitive Biases and Strategic Decision Making Tendency to generalize from a small sample or a single vivid anecdote Violates the statistical law of large numbers Representativeness Tendency to overestimates one’s ability to control events General or top managers are more prone to this Illusion of control Arises from our predisposition to estimate the probability of an outcome based on how easy it is to imagine it Availability error

Techniques for Improving Decision Making A member of a decision-making team identifies all the considerations that might make a proposal unacceptable Possible perils of recommended courses of action are brought into light Devil’s advocacy Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action Promotes strategic thinking Dialectic inquiry Identification of past successful or failed strategic initiatives to determine if they will work for the current project Outside view

Characteristics of Good Strategic Leaders Vision, eloquence, and consistency Articulation of a business model Commitment Being well informed Willingness to delegate and empower Astute use of power Emotional intelligence Self-awareness, self-regulation, and motivation Empathy and social skills