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W e l c o m e to the 3 rd Semester, & sessions on Strategic Management

Some ‘Ground Rules’…… If any mobile phone instrument rings, or is used, during class, the instrument will be summarily confiscated; Permission to enter the class ‘late’ shall be restricted to 5 minutes from the scheduled start of class

What Is Strategy and Why Is It Important?

“ Without a strategy the organization is like a ship without a rudder.”

Sun Tzu* on Strategy “ Know your enemy (rival), know yourself,… and your victory will not be threatened. Know the terrain, know the weather,… and your victory will be complete.” * Chinese Strategist

If you don’t know where you’ve been, then it’s hard to figure out where you are. If you don’t know where you are, how can you decide where you want to go? If you don’t know where you’re going, any road will get you there.

“ If you don’t know where to go, you won’t get there.”

The Three Big Strategic Questions 1. Where is the company now? 2. Where does the company want to go? 3. How will the company get there?

This session’s Roadmap What Is Strategy? The Relationship Between a Company’s Strategy and Its Business Model What Makes a Strategy a Winner? Why Are Crafting and Executing Strategy Important?

What Is Strategy? Embodies a firm’s objectives and reasons for being in business It is a firm’s vision of its future It is an explicit statement that provides direction for coordinated business decisions in marketing and other functional areas

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 Attract and please customers Stake out a market position Compete successfully Grow the business Achieve targeted objectives

4 + 2 dimensions of Strategy The Product-Market in which the business will compete The level of Investment in a strategic unit Functional area strategies required for competing in the chosen product market Underlying Strategic Assets & Skills that give the firm a sustainable competitive advantage

Dimensions for multi-business firm Allocation of firm’s resources across business units How to create Synergies across the businesses?

What Are a Company’s Strategic Choices? Trial-and-error organizational learning about What has worked and What has not worked Management’s appetite for taking risks Managerial analysis and strategic thinking about how best to proceed, given prevailing circumstances Strategic choices are based on . . .

Key Elements: Southwest Airlines’ Strategy Grow the business by gradually adding more flights on existing routes and initiating service to new airports Make friendly service a company trademark Maintain an aircraft fleet of only Boeing 737s Encourage customers to make reservations and purchase tickets at the company’s Web site Avoid flying into congested airports Employ a point-to-point route system Economize on Amount of time it takes terminal personnel to check passengers in and on-load passengers Costs

Striving for Competitive Advantage To achieve sustainable competitive advantage, a company’s strategy usually must be aimed at either Providing a distinctive product or service or Developing competitive capabilities rivals can not match Achieving a sustainable competitive advantage greatly enhances a company’s prospects for Winning in the marketplace and Realizing above-average profits

Strategic Approaches to Building Competitive Advantage Strive to be the industry’s low-cost provider Outcompete rivals on a key differentiating feature 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

Examples: Strategies 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

A Company’s Strategy Is Partly Proactive and Partly Reactive

A company’s strategy is a work in progress Changes may be necessary to react to Fresh moves of competitors Evolving customer preferences Technological breakthroughs Shifting market conditions Crisis situations Strategies Evolve

Crafting Strategy Is an Exercise in Entrepreneurship Strategy-making is a market-driven activity that involves Studying market trends and competitors’ actions Keen observation of customer needs Scrutinizing business possibilities based on new technologies Building firm’s market position via acquisitions or new product introductions Pursuing ways to strengthen firm’s competitive capabilities Proactively searching out opportunities to Do new things or Do existing things in new or better ways

Ethical and moral standards go beyond LAW, to issues of Duty and “right” vs. “wrong” Ethical and moral standards address “What is the right thing to do?” Two criteria of an ethical strategy: Avoids actions and behaviors that cross the line from “can do” to “should not do’ and “unsavory” or “shady” and Allows management to fulfill its ethical duties to all stakeholders Linking Strategy With Ethics

What Is a Business Model? A business model addresses “How do we make money in this business?” Is the strategy capable of delivering good bottom-line results? Do the revenue-cost-profit economics of the strategy make good business sense? Look at revenue streams the strategy is expected to produce Look at associated cost structure and potential profit margins Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?

Strategy - Deals with a company’s competitive initiatives and business approaches Business Model -Concerns whether revenues and costs flowing from the strategy demonstrate the business can be amply profitable and viable Relationship Between Strategy and 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

Redhat Linux’s Business Model Rely on collaborative efforts of volunteer programmers to create the software 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 Release updated versions of Red Hat Linux every 4-6 months to small users and every 12-18 months to corporate users Make source code open and available to all users Make money by providing fees-based training, consulting, support, engineering, and content management services

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

Good Strategy + Good Strategy Execution = Good Management

Excellent execution of an excellent strategy is the best test of managerial excellence

The Managerial Process of Crafting and Executing Strategy

“ Management’s job is not to see the company as it is . . . but as it can become.”

Strategy-Making, Strategy-Executing Process

A strategic vision is a road map showing the route a company intends to take in developing and strengthening its business. It paints a picture of a company’s destination and provides a rationale for going there.

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

Delineates management’s aspirations for the business – Charts a strategic path for the future “Where are we going?” Steers energies of employees in a common direction Moulds organizational identity Is distinctive and specific to a particular organization Avoids use of generic language Triggers strong emotions Is challenging, uncomfortable, nail biting Key Elements of Strategic Vision

Exelon’s Strategic Vision One Company, One Vision. Exelon strives to build exceptional value - by becoming the best and most consistently profitable electricity and gas company in the United States. To succeed, we must . . . Live up to our commitments . . . Perform at world-class levels . . . Invest in our consolidating industry . . .

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 success financially, be the premier provider of financial services in every one of our markets, and be known as one of America’s great companies.

Examples of Strategic Visions Wyeth Our vision is to lead the way to a healthier world. By carrying out this vision at every level of our organization, we will be recognized by our employees, customers, and shareholders as the best pharmaceutical company in the world, resulting in value for all. We will achieve this by: Leading the world in innovation by linking pharmaceutical, biotech, and vaccines technologies Making quality, integrity, and excellence hallmarks of the way we do business Attracting, developing, and motivating the best people Continually growing improving our business

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?”] Nike To bring innovation & inspiration to every athlete in the world.

Examples of Strategic Visions Intel Our vision: Getting to a billion connected computers worldwide, millions of servers, and trillions of dollars of e-commerce. Intel’s core mission is being the building block supplier to the Internet economy and spurring efforts to make the Internet more useful. Being connected is now at the center of people’s computing experience. We are helping to expand the capabilities of the PC platform and the Internet . . . We have seen only the early stages of deployment of digital technologies.

Examples of Strategic Visions Heinz Our vision, quite simply, is to be the world’s premier food company, offering nutritious, superior tasting foods to people everywhere. Being the premier food company does not mean being the biggest but it does mean being the best in terms of consumer value, customer service, employee talent, and consistent and predictable growth. General Electric We will become number one or number two in every market we serve, and revolutionize this company to have the speed and agility of a small enterprise.

The mission statement of most companies 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 Strategic Vision vs. Mission

Defines current business activities, highlighting boundaries of current business Present products and services Types of customers served Conveys Who we are, What we do, and Why we are here Characteristics of a Mission Statement

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 profit is an objective or intended outcome !

Key Elements of a Mission Statement Three factors to consider Customer needs – What is being satisfied Customer groups – Who is being satisfied Technologies/resources/business approaches used and activities performed – How customer needs are satisfied

Trader Joe’s Mission Statement 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)

A statement of values is often provided to guide the company’s pursuit of its vision Values – Beliefs, business principles, and ways of doing things that are incorporated into Company’s operations Behavior of workforce Values statements Contain between four and eight values Are ideally tightly connected to and reinforce company’s vision, strategy, and operating practices Linking the Vision With Company Values Values

Example: Company Values Home Depot 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

Example: Company Values Du Pont Safety Ethics Environmental stewardship Respect for people

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 Communicating the Strategic Vision

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.”

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.”

Overcoming Resistance to a New Strategic Vision 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

Strategic Inflection Points There are times when companies come to a major fork in the road. Perhaps because market conditions are changing rapidly in ways that threaten or endanger the company’s business prospects Perhaps because the strategy simply runs out of stream Perhaps because the actions of competitors block the success of the company’s present strategic course and strategy Critical decisions have to be made about where do we go from here A major new directional path may have to be taken A major new strategy may be needed

Intel’s “Strategic Inflection Points” Prior to mid-1980s Focus on memory chips Starting in mid-1980s Abandon memory chip business (due to lower-cost Japanese companies taking over the market) and Become preeminent supplier of microprocessors to PC industry Make PC central appliance in workplace and home Be undisputed leader in driving PC technology forward 1998 Shift focus from PC technology to becoming the preeminent building block supplier to the Internet economy

Crystallizes an organization’s long-term direction Reduces risk of rudderless decision-making Assists in gaining support of organizational members for changes to make the vision a reality Helps keep strategy-related actions of managers on common path Helps an organization prepare for the future Payoffs of a Clear Strategic Vision

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

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!

Outcomes focused on improving financial performance Outcomes focused on improving long-term competitive business position Types of Objectives Required Financial Objectives Strategic Objectives $

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: Financial Objectives

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: Strategic Objectives

Unilver’s Strategic and Financial Objectives Grow annual revenues by 5-6% annually Increase operating profit margins from 11% to 16% within 5 years Trim company’s 1200 food, household, and personal care products down to 400 core brands Focus sales and marketing efforts on those brands with potential to become respected, market-leading global brands Streamline company’s supply chain

Seagate Technology’s Strategic Objectives Solidify the company’s No. 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

DuPont’s Financial and Strategic Objectives 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 Increasing productivity, Selling enough new products each year that average prices and average margins rise, and 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)

3M Corporation’s Financial and Strategic Objectives To achieve annual growth in earnings per share of 10% or better, on average A return on stockholders’ equity of 20-25% A return on capital employed of 27% or better Have at least 30% of sales come from products introduced in the past four years

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 and business prospects Achievement of strategic performance targets Signals growing competitiveness Signals growing strength in the marketplace

Balanced Scorecard Approach – Strategic and Financial Objectives Balanced scorecard approach for measuring company performance requires both – Financial objectives Strategic objectives Emphasis on financial performance may assume priority over strategic performance when company’s Financial performance is dismal and Survival is threatened Otherwise, management is advised to put more emphasis on achieving strategic objectives

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

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective! Concept of Strategic Intent

Characteristics of Strategic Intent Indicates firm’s intent to making quantam 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 that is out of proportion to its immediate capabilities and market position but then 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

1. First, establish 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 Objectives Are Needed at All Levels

Importance of Top-Down Objectives Guide objective-setting and strategy-making at lower levels Ensures financial and strategic performance targets for all business units, divisions, and departments are directly connected to achieving company-wide objectives Integration of objectives has two advantages Helps produce cohesion among objectives and strategies of different parts of organization Helps unify internal efforts to move a company along the chosen strategic path

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

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 firm’s market position via acquisitions or new products Pursuing ways to strengthen firm’s competitive capabilities Our strategy will be . . .

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, and strategy-executing role – ranging from minor to major – for the area he or she heads!

Strategizing: 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

Levels of Strategy-Making in a Diversified Company Corporate Strategy Business Strategies Functional Strategies Operating Strategies Two-Way Influence Two-Way Influence Two-Way Influence Corporate-Level Managers Business-Level Managers Functional Managers Operating Managers

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

Tasks of Corporate Strategy Moves to achieve diversification Actions to boost performance of individual businesses Capturing valuable cross-business synergies to provide 1 + 1 = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses

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

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

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

Uniting the Company’s Strategy-Making Effort A firm’s strategy is really 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 strategy should fit together like the pieces of a puzzle

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

Phase 4 of the Strategy-Making Process

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 Implementing and Executing Strategy

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 Strategy Implementation Involve?

Characteristics of Good Strategy Execution Involves creating strong “fits” between strategy and Organizational capabilities Reward structure Internal operating systems Organization’s work climate and culture The stronger the “fits ” the Better the execution Higher a company’s odds of achieving its performance targets

Phase 5 of the Strategy-Making Process

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

Monitoring, Evaluating, and Adjusting as Needed 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

Corporate Governance: Strategic Role of a Board of Directors 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

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 Have courage to intervene when things are not going well or to rein in a CEO who steps “out of bounds”

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 its strategy, and 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

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