Strategic Management: Creating Competitive Advantages Chapter One McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO1.1 The definition of strategic management and its four key attributes. LO1.2 The strategic management process and its three interrelated and principal activities. LO1.3 The vital role of corporate governance and stakeholder management as well as how “symbiosis” can be achieved among an organization’s stakeholders.

Learning Objectives (cont.) LO1.4 The importance of social responsibility, including environmental sustainability, and how it can enhance a corporation’s innovation strategy. LO1.5 The need for greater empowerment throughout the organization. LO1.6 How an awareness of a hierarchy of strategic goals can help an organization achieve coherence in its strategic direction.

Two Perspectives of Leadership Romantic view Leader is the key force in organization’s success External control perspective Focus is on external factors that may affect an organization’s success Leaders can make a difference Must be aware of opportunities and threats faced in external environment Must have thorough understanding of the firm’s resources and capabilities

QUESTION External control Romantic Internal mechanism Operational A CEO made a lot of mistakes such as committing errors in assessing the market and competitive conditions and improperly redesigning the organization into numerous business units. Such errors led to significant performance declines. This illustrates the __________ perspective of leadership.  External control Romantic Internal mechanism Operational Answer: B - romantic See previous slide

Example: 3M Elements of Buckley’s turnaround Set clear business goals for the company Wanted 3M to develop lower-cost products to compete in emerging markets Became an outspoken champion for 3M labs

What is Strategic Management? Strategic management must become both a process and a way of thinking throughout the organization Leaders must be proactive, anticipate change, and continually refine changes to their strategies

Defining Strategic Management Analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages Strategic management is the study of why some firms outperform others How to compete in order to create competitive advantages in the marketplace How to create competitive advantages in the market place Unique and valuable Difficult for competitors to copy or substitute

Defining Strategic Management Analysis Strategic goals Internal and external environment of the firm Strategic decisions What industries should we compete in? How should we compete in those industries? Analysis Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm Strategic decisions What industries should we compete in? How should we compete in those industries?

Defining Strategic Management Actions Allocate necessary resources Design the organization to bring intended strategies to reality

Two Fundamental Questions How should we compete in order to create competitive advantages in the marketplace? How can we create competitive advantages in the marketplace that are unique, valuable, and difficult for rivals to copy or substitute? Operational effectiveness – performing similar activities better than rivals

Strategic Management Concepts Exhibit 1.1

Key Attributes of Strategic Management Stakeholders those individuals, groups, and organizations who have a “stake” in the success of the organization, including owners (shareholders in a publicly held corporation), employees, customers, suppliers, the community at large, 1-13

Key Attributes of Strategic Management Ambidexterity The challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities Ambidexterity - The challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities

Ambidextrous Behaviors in Individuals They take time and are alert to opportunities beyond the confines of their own jobs They are brokers, always looking to build internal networks They are cooperative and seek out opportunities to combine their efforts with others They are multitaskers who are comfortable wearing more than one hat They take time and are alert to opportunities beyond the confines of their own jobs They are cooperative and seek out opportunities to combine their efforts with others They are brokers, always looking to build internal networks They are multi-taskers who are comfortable wearing more than one hat How does one become a more ambidextrous leader? Consider the following questions: Do you meet your numbers? Do you help others? What do you do for your peers? When you manage up, do you bring problems – or problems with possible solutions? Are you transparent? Are you developing a group of senior managers who know you and are willing to back your original ideas with resources?

Strategic Management Process Intended strategy Decisions are determined only by analysis Realized strategy Decisions are determined by both analysis and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial preferences

Strategic Management Process Adapted from Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same Source: H. Mintzberg and J. A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6 (1985), pp. 257-72. Exhibit 1.2

Strategic Management Process The Strategic Management Process Exhibit 1.3 1-18

Strategic Analysis Consists of “advance work” that must be done in order to effectively formulate and implement strategies Starting point Starting point in the strategic management process Analyzing organizational goals and objectives – Ch 1 Analyzing the external environment of the firm – Ch 2 Assessing the internal environment of the firm – Ch 3 Assessing a firm’s intellectual assets – Ch 4

Strategy Formulation A firm’s strategy formulation is developed at several levels: Business-level Corporate level International Entrepreneurial Business level strategy Addresses the issue of how to compete in a given business to attain competitive advantage Corporate-level strategy What businesses should we be in? How can businesses be managed to achieve synergy? International strategy What is the appropriate entry strategy? How do we go about attaining competitive advantage in international markets? Entrepreneurial strategy How do we recognize viable opportunities? How do we formulate an effective strategy? Formulating business level strategy – Ch 5 Formulating corporate level strategy – Ch 6 Formulating international strategy – Ch 7 Entrepreneurial strategy and competitive dynamics – Ch 8

Strategy Implementation Ensuring proper strategic controls and organizational designs Establishing effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and alliance partners Strategic control and corporate governance – Ch 9 Creating effective organizational designs – Ch 10 Creating a learning organization and an ethical organization – Ch 11 Fostering corporate entrepreneurship – Ch 12

Corporate Governance and Stakeholder Management The relationship among various participants in determining the direction and performance of corporations Shareholders, management, board of directors Corporate governance The relationship among various participants in determining the direction and performance of corporations Shareholders Management (led by the CEO) Board of Directors

Corporate Governance and Stakeholder Management (cont.) Board of Directors Elected representatives of the owners Ensure interests and motives of management are aligned with those of the owners Exhibit 1.4

Corporate Governance Three mechanisms ensure effective corporate governance: An effective and engaged board of directors Shared activism Proper managerial rewards and incentives

Stakeholder Management Zero sum view Stakeholders compete for attention and resources of the organization Gain of one is a loss to the other Rooted in the traditional conflict between workers and management

Stakeholder Management Stakeholder symbiosis view Stakeholders are dependent upon each other for their success and well-being Mutual benefits 1-26

QUESTION Outback Steakhouse has developed a sophisticated quantitative model and found that there were positive relationships between employee satisfaction, customer satisfaction, and financial results. This is an example of __________.  A. Zero-sum relationship among stakeholders B. Stakeholder symbiosis C. Rewarding stakeholders D. Emphasizing financial returns Answer: B – stakeholder symbiosis. See the previous slide

Crowdsourcing Crowdsourcing practice wherein the Internet is used to tap a broad range of individuals and groups to generate ideas and solve problems. Linux, Amazon, Wikipedia

Social Responsibility The expectation that businesses or individuals will strive to improve the overall welfare of society Social responsibility The expectation that businesses or individuals will strive to improve the overall welfare of society Managers must take active steps to make society better

Social Responsibility Triple bottom line Assessment of a company’s performance in financial, social, and environmental dimensions Triple bottom line Assessment of a company’s performance in financial, social, and environmental dimensions Failure to account for the environmental and social costs of doing business poses risks to the company and its community

Example: Social Responsibility Starbucks Coffee Company defines CSR as: Conducting business in ways that produce social, environmental and economic benefits for the communities in which we operate and for the company’s stakeholders, including shareholders. Some tangible benefits include attracting and retaining our partners, customer loyalty, reducing operating costs, and creating a sustainable supply chain. Starbucks Coffee Company Managing CSR Starbucks continues to evolve and strengthen the way CSR is managed internally. We have created structures to ensure that emerging issues are identified, prioritized and addressed in a more systematic and integrated manner throughout the company; and that company policies and procedures are upheld and followed. Our Emerging Issues Council, CSR Executive Committee and Policy Governance Council serve these functions respectively. Throughout the company, there is a strong sense of shared accountability for CSR. In fiscal 2007, we took both a centralized and decentralized organizational approach to managing CSR. At the Starbucks Support Center, our global headquarters located in Seattle, there was a dedicated CSR group, reporting to the senior vice president of CSR, for the day-to-day management of specific CSR-related initiatives. This group often serves as the catalyst for new CSR programs, which may end up being managed and implemented at the business unit, division or department level. Once implemented, the CSR team provided broad oversight and served as an ongoing resource. Currently there is not a committee of the board dedicated to CSR. Source: http://www.starbucks.com/aboutus/csrreport/csr.htm

Strategic Management Perspective All managers and employees must: Take an integrative, strategic perspective of issues facing the organization Assess how functional areas and activities “fit together” to achieve goals and objectives Managers must make a major effort to effect transformational change Involves extensive communication, incentives, training and development

Three Types of Leaders Local line leaders Executive leaders Have significant profit-and-loss responsibility Executive leaders Champion and guide ideas, create a learning infrastructure, establish a domain for taking action

Three Types of Leaders (cont.) Internal networkers Generate power through the conviction and clarity of their ideas

Coherence in Strategic Direction Hierarchy of goals organizational goals ranging from, at the top, those that are less specific yet able to evoke powerful and compelling mental images, to, at the bottom, those that are more specific and measurable. Vision, mission statement, strategic objectives Hierarchy of goals Goals ranging from, at the top, those that are less specific yet able to evoke powerful and compelling mental images, to, at the bottom, those that are more specific and measurable Vision, mission statement, strategic objectives

A Hierarchy of Goals Exhibit 1.6

Coherence in Strategic Direction Organizational vision Goal that is “massively inspiring, overarching, and long term” Represents a destination that is driven by and evokes passion

Why Do Visions Fail? The walk doesn’t match the talk Irrelevance Too much focus leads to missed opportunities Not the holy grail An ideal future irreconciled with the present

Coherence in Strategic Direction Mission statement Set of goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage Has the greatest impact when it reflects an organization’s enduring, overarching strategic priorities and competitive positioning Mission statement Set of goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage Incorporates the concept of stakeholder management Has the greatest impact when it reflects an organization’s enduring, overarching strategic priorities and competitive positioning

Coherence in Strategic Direction Strategic objectives A set of organizational goals that are used to operationalize the mission statement and that are specific and cover a well-defined time frame. Help channel employees’ efforts toward common goals Help inspire employees to higher levels of commitment and effort