1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2: Leading the Process of Crafting and Executing Strategy Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. 2-2 Chapter Learning Objectives 1. Grasp why it is critical for company managers to think long and hard about where a company needs to head and why. 2. Understand the importance of setting both strategic and financial objectives. 3. Recognize that the task of crafting a company strategy draws on the entrepreneurial talents of managers at all organizational levels. 4. Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets. 5. Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently. 6. Understand why the strategic management process is ongoing, not an every-now-and-then task. 7. Learn what leadership skills management must exhibit to drive strategy execution forward. 8. Become aware of the role and responsibility of a company’s board of directors in overseeing the strategic management process.

3. 2-3 Chapter Roadmap 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 Leading the Strategic Management Process Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process

4. Figure 2.1: The Strategy-Making, Strategy-Executing Process 2-4

5. 2-5 Developing a Strategic Vision Involves thinking strategically about  Future direction of company  Changes in company’s product/market/customer technology to improve  Current market position  Future prospects Phase 1 A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company’s strategic course in preparing for the future.

6. 2-6 Key Elements of a Strategic Vision Delineates management’s aspirations for the business Provides a panoramic view of “where we are going” Charts a strategic path Is distinctive and specific to a particular organization  Avoids use of generic language that is dull and boring and that could apply to most any company Captures the emotions of employees and steers them in a common direction Is challenging and a bit beyond a company’s immediate reach

7. 2-7 Role of a Strategic Vision A well-conceived, well-communicated vision functions as a valuable managerial tool to  Give the organization a sense of direction, mold organizational identity, and create a committed enterprise  Illuminate the company’s directional path  Provide managers with a reference point to  Make strategic decisions  Translate the vision into hard-edged objectives and strategies  Prepare the company for the future A strategic vision exists only as words and has no organizational impact unless and until it wins the commitment of company personnel and energizes them to act in ways that move the company along the intended strategic path!

8. Table 2.2: Characteristics of an Effectively Worded Vision Statement 2-8

9. Table 2.3: Common Shortcomings in Company Vision Statements 2-9

10. Strategic Vision vs. Mission A strategic vision concerns a firm’s future business path - “where we are going”  Markets to be pursued  Future product/market/ customer/technology focus  Kind of company management is trying to create A company’s mission statement typically focuses on its present business purpose - “who we are and what we do”  Current product and service offerings  Customer needs and customer groups being served  Geographic coverage 2-10

11. 2-11 Characteristics of a Mission Statement Identifies boundaries of a company’s current business and says something about  Present products and services  Types of customers served  Geographic coverage Conveys  Who we are,  What we do, and  Why we are here A good mission statement describes a company’s business makeup and purpose in language specific enough to give the company its own identity and distinguish it from other enterprises in the same or other industries!

12. 2-12 Key Elements of a Mission Statement A complete mission statement should cover three things:  Customer needs being met – What is being satisfied  Customer groups or markets being served – Who is being satisfied  What the organization does (in terms of business approaches, technologies used, and activities performed) to satisfy the targeted needs of the targeted customer groups – How customer needs are satisfied 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!

13. 2-13 Companies often develop a statement of values to guide a company’s pursuit of its vision and strategy and paint the white lines for how a company’s business is to be conducted  Company values statements typically contain four to eight beliefs, traits, and behaviors relating to such things as  Fair treatment, integrity, ethical behavior, innovation, teamwork, product quality, customer satisfaction, social responsibility, community citizenship But values statements remain a bunch of nice words until espoused beliefs, traits, and behaviors are  Incorporated into company’s operations and work practices  Used as benchmarks for job appraisal, promotions, and rewards Linking the Vision with Company Values If company personnel are not held accountable for displaying company values in doing their jobs, then the company values statement is a bunch of empty words!

14. 2-14 Winning support for the vision involves  Putting “where we are going and why” in writing  Distributing the statement organization-wide  Having executives explain vision to employees An engaging, inspirational vision  Challenges and motivates workforce  Articulates a compelling case for where company is headed  Evokes positive support and excitement  Arouses a committed organizational effort to move in a common direction Communicating the Strategic Vision

15. 2-15 Recognizing Strategic Inflection Points Sometimes an order-of-magnitude change occurs in a company’s environment that  Dramatically alters its future prospects  Mandates radical revision of its strategic course Critical decisions have to be made about where to go from here  A major new directional path may have to be taken  A major new strategy may be needed Responding quickly to unfolding changes in the marketplace lessons a company’s chances of  Becoming trapped in a stagnant business or  Letting attractive new growth opportunities slip away

16. 2-16 Mobilizing support for a new vision entails  Reiterating basis for the new direction  Addressing employee concerns head-on  Calming fears  Lifting spirits  Providing updates and progress reports as events unfold Overcoming Resistance to a New Strategic Vision

17. 2-17 Crystallizes an organization’s long-term direction Reduces risk of rudderless decision-making Creates a committed enterprise where organizational members enthusiastically pursue efforts to make the vision a reality Provides a beacon to keep strategy-related actions of all managers on common path Helps an organization prepare for the future Payoffs of a Clear Strategic Vision

18. 2-18 Setting Objectives Purpose of setting objectives  Converts vision into specific performance targets  Creates yardsticks to track performance Well-stated objectives are  Quantifiable  Measurable  Contain a deadline for achievement Spell-out how much of what kind of performance by when Phase 2

19. 2-19 Importance of Setting Stretch Objectives Objectives should be set at levels that stretch an organization to  Perform at its full potential, delivering the best possible results  Push firm to be more inventive  Exhibit more urgency to improve its business position  Be intentional and focused in its actions There’s no better way to avoid ho-hum results than by setting stretch objectives and using compensation incentives to motivate organization members to achieve the stretch performance targets!

20. Types of Objectives Required Financial ObjectivesStrategic Objectives Outcomes focused on improving financial performance Outcomes focused on improving competitive strength and market standing $

21. 2-21 Examples: Financial Objectives Annual revenue growth of X% X % increase in after-tax profits annual Earnings per share growth of X% annually Annual dividend increases of X% Profit margins of X% X% return on capital employed (ROCE) Annual stock price increases that average X% over time Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investment Stable earnings during periods of recession

22. 2-22 Winning an X% market share within 3 years Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service within 2 years Deriving X% of revenues from sale of new products introduced in past 5 years Being the recognized industry leader in product innovation and/or technological know-how Having a wider product line than rivals Consistently getting new or improved products to market ahead of rivals Having stronger national or global sales and distribution capabilities than rivals Examples: Strategic Objectives

23. 2-23 Achieving good financial performance is not enough  Current financial results are “lagging indicators” reflecting results of past decisions and actions — good profitability now does not translate into stronger capability for delivering even better financial results later However, setting well-chosen strategic objectives and achieving them signals  Growing competitiveness  Growing strength in the marketplace A company that is growing competitively stronger is developing the capability for better financial performance in the years ahead  Good strategic performance is thus a “leading indicator” of a company’s capability to deliver improved future financial performance Good Strategic Performance Is the Key to Better Financial Performance Unless a company sets and achieves stretch strategic objectives it is not developing the competitive muscle to deliver even better financial results in the years ahead!

24. 2-24 A balanced scorecard for measuring company performance is optimal; it entails  Setting financial and strategic objectives  Placing balanced emphasis on achieving both types of objectives (However, if a company’s financial performance is dismal or if its very survival is in doubt because of poor financial results, then stressing the achievement of the financial objectives and temporarily de- emphasizing the strategic objectives may have merit) Just tracking financial performance overlooks the importance of measuring whether a company is strengthening its competitiveness and market position A Balanced Scorecard Approach – Setting Strategic and Financial Objectives The surest path to sustained future profitability year after year is to relentlessly pursue strategic outcomes that strengthen a company’s business position and give it a growing competitive advantage over rivals!

25. 2-25 Both Short-Term and Long-Term Objectives Are Needed Short-term objectives  Targets to be achieved soon  Milestones or stair steps for reaching long-range performance targets Long-term objectives  Targets to be achieved within 3 to 5 years  Calls for actions now that will permit reaching targeted long-range performance later

26. 2-26 Concept of Strategic Intent A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective!

27. 2-27 Characteristics of Strategic Intent Indicates firm’s intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds Involves establishing a grandiose performance target out of proportion to immediate capabilities and market position but then devoting the firm’s full resources and energies to achieving the target over time Entails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position

28. 2-28 Objectives Are Needed at All Levels 1. First, set organization-wide objectives and performance targets 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. Individual objectives are established last The objective-setting process is more top- down than bottom up

29. 2-29 Crafting a Strategy Strategy-making involves astute entrepreneurship  Actively searching for opportunities to do new things or  Actively searching for opportunities to do existing things in new or better ways Strategizing involves  Developing timely responses to happenings in the external environment and  Steering company activities in new directions dictated by shifting market conditions Phase 3

30. 2-30 Crafting a Good Strategy Requires Good Business Entrepreneurship Developing a winning strategy involves  Diagnosing the direction and force of the market changes underway and making timely strategic adjustments  Spotting new or better ways to satisfy customer needs  Figuring out how to outwit and outmaneuver competitors  Pursuing ways to strengthen the firm’s competitive capabilities  Proactively trying to out-innovate rivals

31. 2-31 The Role of Astute Entrepreneurship in Crafting a Company’s Strategy Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts  Innovating more creatively  Being more efficient  Being more imaginative  Adapting faster Rather than running with the herd! Good strategy-making is therefore inseparable from good entrepreneurship— one cannot exist without the other!

32. 2-32 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 (R&D, production, marketing, HR, finance, and so on) How to achieve targeted levels of performance

33. 2-33 Who Is Involved in Strategy Making? CEO (chief executive officer)  Has ultimate responsibility for leading the strategy-making process  Functions as strategic visionary and chief architect of strategy Senior executives  Typically have influential roles in fashioning those strategy components involving their areas of responsibility Managers of subsidiaries, divisions, geographic regions, plants, and other important operating units (and, often, key employees with specialized expertise)  Some pieces of the strategy are best orchestrated by on- the-scene company personnel with detailed familiarity of the piece of the business they are in charge of running

34. 2-34 Why Is Strategy-Making Nearly Always a Collaborative Process? The job is often way too big for one person or a small executive group—many strategic issues are complex or cut across multiple areas of expertise The more a company’s operations cut across different products, industries and geographic areas, the more that headquarters executives must delegate strategy-making authority to down-the-line managers in charge of particular functions and operating units In today’s companies every manager typically has a strategy-making role—ranging from major to minor—for the area he or she heads!

35. Figure 2.2: A Company’s Strategy-Making Hierarchy 2-35

36. 2-36 Uniting the Company’s Strategy-Making Effort A firm’s strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy Pieces of strategy should fit together like the pieces of a puzzle Key approaches used to unify all strategic initiatives into a cohesive, company-wide action plan  Effectively communicate company’s vision, objectives, and major strategies to all personnel  Diligently review lower-level strategies for consistency and support of higher-level strategies—revise as needed

37. What Is a Strategic Plan? Its strategic vision and business mission Its strategy Its strategic and financial objectives A Company’s Strategic Plan Consists of 2-37

38. 2-38 Implementing and Executing Strategy Operations-oriented activity aimed at performing core business activities in a strategy-supportive manner Tougher and more time-consuming than crafting strategy Key tasks include  Improving the efficiency with which the strategy is being executed  Showing measurable progress in achieving both operating excellence and targeted results Phase 4

39. 2-39 Building a capable organization 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 Creating a strategy-supportive corporate culture Exerting the leadership necessary to drive the process forward and keep improving What Does Implementing and Executing the Strategy Involve?

40. 2-40 Crafting and implementing a strategy is 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 a need for corrective actions and adjustments on an as-needed basis Evaluating Performance and Making Corrective Adjustments Phase 5

41. 2-41 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

42. 2-42 Leading the Strategic Management Process Diverse leadership challenges include  Exerting take-charge leadership  Being a spark plug for change and action  Ramrodding things through  Achieving results Leading the strategic management process can involve various styles and approaches  Being a hard-nosed authoritarian  Being a perceptive listener  Being a compromising decision maker  Delegating authority to people closest to the action  Being a coach  Assuming a highly visible role in guiding the process  Making brief ceremonial appearances

43. 2-43 1. Stay on top of what’s happening 2. Make sure company has a good strategic plan 3. Put constructive pressure on company to achieve good results 4. Push corrective actions to improve overall strategic performance 5. Lead development of stronger core competencies and competitive capabilities 6. Display ethical integrity and lead social responsibility initiatives Things a Chief Strategy Implementer Must Do to Be Successful

44. 2-44 Develop a broad network of formal and informal sources of information Talk with many people at all levels Be an avid practitioner of MBWA  Observe situation firsthand Monitor operating results regularly Get feedback from customers Watch competitive reactions of rivals Role #1: Stay on Top of What’s Happening

45. 2-45 Role #2: Make Sure Company Has a Good Strategic Plan Two key responsibilities of CEO and top- level executives  Effectively communicate company’s vision, objectives, and major strategy components to down-the-line managers and key personnel  Exercise due diligence in reviewing lower-level strategies for consistency and support of higher- level strategies Effective leadership minimizes potential for conflict between different levels in the strategy hierarchy

46. 2-46 Successful leaders spend time  Mobilizing organizational energy behind  Good strategy execution and  Operating excellence  Nurturing a results-oriented work climate  Promoting enabling cultural drivers  Strong sense of involvement on part of company personnel  Emphasis on individual initiative and creativity  Respect for contributions of individuals and groups  Pride in doing things right Role #3: Put Constructive Pressure on Company to Achieve Good Results

47. 2-47 Role #4: Push Corrective Actions to Improve Strategy-Making and Strategy-Execution Requires deciding  When adjustments are needed  What adjustments to make Involves  Adjusting long-term direction, objectives, and strategy on an as-needed basis in response to unfolding events and changing circumstances  Promoting fresh initiatives to bring internal activities and behavior into better alignment with strategy  Making changes to pick up the pace when results fall short of performance targets

48. 2-48 Top management intervention is required to establish better or new  Resource strengths and competencies  Competitive capabilities Senior managers must lead the effort because  Competencies reside in combined efforts of different work groups and departments, thus requiring cross-functional collaboration  Stronger competencies and capabilities can lead to a competitive edge over rivals Role #5: Promote Stronger Core Competencies and Capabilities

49. 2-49 Role #6: Display Ethics Leadership and Lead Social Responsibility Initiatives Set an excellent example in  Displaying ethical behaviors  Demonstrating character and personal integrity in actions and decisions Declare unequivocal support for high ethical standards and expect all employees to conduct themselves in an ethical fashion Encourage compliance and establish tough consequences for unethical behavior

50. 2-50 Exercise strong oversight to ensure 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

51. 2-51 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 a company’s financial accounting and reporting practices

52. 2-52 Key Responsibilities of Board Members Be well informed about a company’s performance Guide and judge CEO and other top executives Exhibit courage to curb inappropriate or unduly risky management actions Confirm that CEO is doing what board expects Provide insight and advice to management Be intensely involved in debating pros and cons of key actions and decisions Board members have a very important oversight role in the strategy-making, strategy-executing process!